Business Management Notes (HL)

Table of Contents page

Business Management Notes (HL)

Table of Contents page
UNIT 1 INTRODUCTION TO BUSINESS
1.1 What is a business
1.2 types of business entities
1.3 business objectives
1.4 Stakeholders
1.5 growth and evolution
1.6 multinational companies (MNCs)
UNIT 2 HUMAN RESOURCE MANAGEMENT
2.1 Introduction to human resource management
2.2 organisational structure
2.3 leadership and management
2.4 motivation and demotivation
2.6 Communication
UNIT 3 FINANCE AND ACCOUNTS
3.1 introduction to finance
3.2 sources of finance
3.3 cost and revenues
3.4 Final accounts
3.5 Profitability and liquidity ratio analysis
3.6 Debt/Equity and other efficiency ratio analysis (HL)
3.7 Cash flow
UNIT 4 MARKETING
4.1 Introduction to marketing
4.2 Market planning
4.4 market research
4.5 the seven P’s of the marketing mix
UNIT 5 OPERATIONS MANAGEMENT
5.5 break-even analysis

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UNIT 1 INTRODUCTION TO BUSINESS

1.1 What is a business

The nature of business

- The transformation process in a business involves converting inputs into output

Inputs / factors of production

- Land
1. Natural resources (oil,gold,water, mineral)
2. Physical land
3. Raw materials and natural resources that are used in making a product
- Capital
1. Non-natural resources
2. Amount of money needed to run a business
3. Man-made goods like machines, buildings, vehicles, and equipment needed for
business to operate
4. Investment - increasing spending on capital
- Labour
1. Physical & mental efforts of people to produce products/services
- Enterprise
1. Ability to create and innovate
2. Come up with new idea
3. Skills that develop new ways of doing things or new thing to do

Profit is an outcome not a resource

Outputs
- Goods
1. Physical item
2. Stock item
- Services
1. Intangible
2. Education, music performance, haircut, doctor
- By-products

The choices on inputs into a business and who supplies then can effect
- Cost of a business
- The quality of the final products and therefore sales = increase

Adding value - occurs in a transformation process when outputs are produces that worth more
than the the inputs brought in to provide them

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Brand - is a name, design, logo, symbol, or indeed anything that makes a product recognizable
and distinguishes it from the competition in the eyes of the customer

USP - unique selling point is feature of a product that makes it different from the competitors for
the customer

Primary, Secondary, Tertiary and Quaternary sector

- Primary sector
1. Refers to the first stage of production
2. Involves acquiring or extracting raw materials
3. Eg: oil, coal, mining, agriculture
- Secondary sector
1. Refers to the part of the economy that manufacturer and assembles products
using the raw materials
2. Eg: cars assembling, construction industries
- Tertiary sector
1. Refers to a business that provides services
2. Eg: retailers, transportation, insurance
- Quaternary sector
1. I a subset of the tertiary sector
2. Sectors represent organisation that are based on knowledge and the skills of
employees and that provide information
3. Eg: research and development business

- Economies start with agriculture, primary sector

- Invest in capital leads to more factories and equipment, development of secondary
sector
- Investment continues, resources move away from mass production processes and
towards higher value adding sectors, service and knowledge (tertiary and quaternary
sector)

Market forces - are the forces of supply and demand which determine the price of the product
and the quantity bought and sold in the market

Opportunity cost - measures the sacrifice made by choosing one option in terms of the next
best alternative

Challenges and opportunities for starting up a business

- Opportunities for starting up a business

1. Changes in the external environment factors will create new business
opportunities

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 2. Social change: ageing population, start business to provide care of services for
elderly
3. Technological change: as technology evolves businesses must input those
technological advances
4. Economic change: growth in an economy can lead to more consumer spending,
creating new markets and opportunities for new businesses
5. Environmental change: reducing the negative impact of business on the
environment have men opportunities
6. Political change: governmental change for example tradiming union with other
countries may provide business opportunities for tourism or exporting business
7. Legal change: new laws can create new possibilities. Example fewer regulations
may reduce the cost of setting up business
8. Ethical change: interest in values of a brand creates opportunities for businesses
with a strong ethical stance

- Challenges for starting up a business

1. A lack of experience of all the different aspects of a business
2. Difficulties raising money to set up and expand
- Business at high risk in the starting stage
- Own funds may be limited
3. Difficulty building brand awareness
- New product has to compete with well established brands
4. A lack of market power because the business is small

summary : start up businesses face challenges internally, lack of funds or a lack of expertise in
some areas of business. External environmental changes can create challenges such as kess
demand perhaps due to negative economic growth or higher costs perhaps due to the effect of
taxes placed on imported inputs.

1.2 types of business entities

Nationalisation- occurs when a govt. Takes ownership of a business from the private sector
into the public sector

Privatisation - occurs when a government transfers ownerships of a business from the public
sector to the private sector

Merit goods - are goods and services such as education and health that the government thinks
private individuals undervalue because they do not appreciate the full benefits of them and
therefore do not consume enough unless the government intervenes

Private vs. Public sectors

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 1. Private Sector
- Goal is to make profit
- Owned, financed and run by private individuals or entities
2. Public Sector
- Goods and services provided by the government or local authority
- May be free or sometimes with a small fee
- e.g., public hospitals, museums, etc.

Unlimited liability- occurs when an individual or group of individuals is personally responsible

for all the actions of their business.

Types of for-profit/commercial organisations

- Sole trader
1. Business that is completely owned and controlled by just one person
2. Simplest form of business
3. Owned by a single person who assumes all profits and liabilities
1. Advantages
- Little legal requirements for setup
- All the income goes to one man
- Less restrictions and easy decision-making (can be motivating)
- Direct contact with the market
- Flexibility in terms of working hours
2. Disadvantages
- All the income tax is shouldered by one man
- Unlimited liability (owner is the same legal entity as the business)
and all the debt incurred by the business is put on the owner
- Sources of finance are limites
- Long hours, limites holidays, leading to stress

- Partnership
1. Company ran by two or more individuals who form a partnership
2. Each person contributes money and resources, as well as sharing the
responsibilities of managing a business.
3. Turns into a corporation if there >15 partners and will pay corporate tax.
4. Has a ‘deed of partnership’ stating the responsibility of each partner
5. Involves presence of "silent" or "sleeping" partners, who do not make decisions,
merely giving money to the business and earning profit
(a) Advantages
- Liability is spread around
- Range of skills
- Higher capital
- Share resources ideas and workload
- More sources of finance than sole trader
(b) Disadvantages
- Unlimited liability despite being spread out between partner
- Slower decision-making
- Share profits

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Shareholders- are persons or organisations that own part of a company. Each share
represents a part ownership of the business the more shares someone owns the more the
company belongs to them. Shareholders influence the policy of the business. Types of shares
grant their owners voting rights. So each share is worth one vote. By buying more shares
people can get more votes and have greater influence over what the first does.

Company- a company if a business organisation which has its own legal identity and which has
limited liability

Limited liability- means that investors can lose the money they have invested into the business
but their personal possessions are safe. There is a limit to their risk

Having limited liability is essential for companies to be able to raise money by selling shares. If
investors invest in a business with unlimited liability it would mean giving their money to others
to use and risking everything they owned. With limited liability you know what the maximum
amount is that you could lose thats that the risk is limited

Why become a shareholder in a company? - by investing shareholders become the owners

of the business. This means if the business is successful the value of their shares could
increase (could sell shares and get more money). Shareholders also receive some of the profits
that the company makes each year.

Dividends - are money that is paid out of profits to shareholders. They are a reward to the
owner of the business More profit a firm makes, the bigger the dividends. Shareholders decide
the amount of dividends to be paid per share. More shares = more dividends received in total.
Shareholders therefore gain financially in 2 ways = by value of share increasing and from the
dividends.

- Private limited company (LTD)

1. Shareholders are limited to family, friends, business partners
2. Shares cannot be sold to the public
3. Type of incorporation
- Owner and company are separate entities
- Results in limited liability
4. Registered at the Securities and Exchange Commision (SEC)
- Advantages
1. Limited liability - when the company is sued or incurs losses, all a
shareholder will lose is his stock in the business, they won't lose
their money. So limited liability for shareholder
2. Higher capital, higher capacity for expansion
3. easier to raise capital than it is for a sole trader or partnership
4. business continues to exist when a shareholder dies
5. cannot lose control, as sale of shares must be approved by all
shareholders
- Disadvantages
1. Corporate taxes (higher)
2. More restrictions

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 - Public limited company (PLC)
1. Company whose shares are listed on a stock exchange and can be freely bought
and sold by anyone
2. Required by law to publish their complete and true financial position
3. Type of incorporation
- Must conduct shareholders' meetings
- An LTD can convert to PLC by offering stock market flotation or an initial
public offering (IPO)
(a) Advantages
- More capital raised from selling stock
- Limited liability
- Continuity after death, freely transferable
- Higher capacity for expansion
(b) Disadvantages
- Possibility of a hostile take-over through shares, control can change
unexpectedly and be lost by the original owner
- Much more restrictions
- Corporate tax

Features of social enterprise

- Social enterprises have a clear public mission, that is, a mission to perform some
social good.
- Social enterprises engage in business-like activities to generate funds to cover
Expenses.
- Social enterprises are mostly not for profit or, if for profit, retain most earnings to
further support the public mission of the enterprise.
- Most social enterprises are socially progressive, not just in economic matters but
also in matters of diversity, inclusion and social justice.

Types of for-profit social enterprises

1. Cooperatives
- Organisations that are jointly owned and run by its members who share in profits
and benefits and have one vote each
- Employee cooperatives- employers who work own business equally
- Community cooperatives - owned by a community to provide a local service
- Retail cooperatives - independent retailers join together
(a) Advantages
- Shareholders must help run the organisation, work is more spread out
- Equal voting rights/ power among all shareholders
(b) Disadvantages
- Decision-making may be more time consuming or involve more conflicts
- Less profit for each shareholder as it is spread among many members

Microfinance providers

- Microfinance - loan service offered to individuals or groups with no access to more

conventional banking services (unemployed, low-income individuals, etc.)

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2. Public-Private Partnerships (PPP)

- Public corporations are sold-off or transferred to the private sector

(a) Advantages
- Incentivized to be more efficient and productive
- Government can focus on other projects and infrastructure
- Enjoy the skills and talents of the private sector (can lead to increased efficiency
and productivity)
(b) Disadvantages
- Services provided would be more expensive
- Prices goes up, government has to subsidise (increase in taxes)
- Aim of profit may lead to cost cutting, lower quality, higher prices

Types of non-profit social enterprises

1. Non-profit businesses
- Run not for profit but to benefit the public (especially the marginalised)
- Operational (objective or purpose) or advocacy (promote or defend a cause)
2. Non-profit organisations (NPOs) vs. non-government organisations (NGOs)
(a) NPOs
- Does not divide its funds between owners
- Aim is to raise funds and use it for their beneficiaries
- e.g. service organisations or charities, Bantay Bata, PGH, PCSO
(b) NGOs
- Exists in the private sector
- NGOs participate in humanitarian projects, education projects, etc.
- e.g. WWF, UNESCO, Red Cross

3. Charities

- A non-profit organisation that is exempt from taxes

- Deploys its resources for charitable purposes
- May raise funds to reduce poverty or to reduce environmental problems.
- e.g. Caritas Manila, Pondo ng Pinoy

4. Pressure Groups

- Organised groups that do not run for election

○ Advocate certain interests such as environment, sexuality, religion, rights, etc.
○ Seeks to manipulate the public or private sector for certain causes.
○ e.g. PETA, Greenpeace, Church, LGBT

1.3 business objectives

Vision statement - sets out what the business wants to be in the future, sets out the hopes and
ambitions of the business

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Mission statement - sets out the overall purpose of a business, the fundamental reasons why a
business exists. Includes who its customers are and the way it does business

Corporate objectives - to turn mission and vision statements into more measurable, specific
and time related targets. Objective is a target that measurable and has a given timescale

Strategy - The long terms plan to achieve an objective is known a strategy, it involves a
considerable commitment of resources

Tactics - are short terms plans that implement the strategy

To be effective an objective should be SMART: features of SMART objective

Specific - objective must define exactly what the firm is measuring such as sales or profits
Measurable - the objective must include a quantifiable target
Agreed - objective must be discussed/than imposed, then people are more likely to commit to it
Realistic - to motivate people targets must be seen as attainable
Time- specific - employees must know how long they have to achieve the objective

Corporate objective - is a target set for the business as a whole

Functional objective - is a target set for one the of the functions of the business such as
marketing, finance, operations or human resources
Labour productivity - measures the output per time period of an employee

- Business objectives in the private sector

1. Profit and profit maximisation
- Profit - are measures by the difference between the total sales revenue
and total costs in a given period
- Formula: total sales revenue - total costs = total profit
- Common measure of success
- Shows that the value (in financial terms) of the output is greater than the
input
- profit is maximised when the difference between sales revenue and total
costa is ats its greatest
2. Survival
- Objective to continue to trade over a defined period of time, rather than
be forced to trade due to poor financial performance such as negative
cash flow.
3. Growth
- Objective to grow is to exploit its market position and earn higher profits
- Growth may bring lower units costs through economies of scale and
greater brand awareness
- Growth can benefit shareholders by providing greater dividends
4. Protecting shareholder value

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 - The value of shares
1. Shareholders want the value of shares to increase overtime.
Managers take care of this
2. If demand of shares increase then share price increases
3. Demand for shares depends on what is going to happen in the
future for the business
4. Managers must convince potential investors that they have a good
plan for the business
5. Plan must lead to higher earning and increase value of company

- The dividends paid

1. Managers must consider how much the recommend to
shareholders as dividend and how they recommended for
investments

5. Cash flow
- Vital element of success as it is essential to pay back debts
- Cash flow is the movement of cash into and out of a business over a
time period
- Cash cycle is the time elapses between the outflow of cash to pay for the
resources needed to produce a product and the receipt of cash following
the sale of the products
- If cash cycle is slow business could go into debt

6. Diversification
- Occurs when a business offers new products and services in a new
market
- Firm may set diversification as a n objective because it allows it to spread
its risk by selling a range of products, rather tna just one, or by trading in
a different market

- Business objectives in the public sector

1. Providing a service to the community
2. Financial objectives
- Not seek to maximise profits but to cover operating costs to avoid
draining the government funds
3. Development of relatively poor regions
4. Ethical objectives
- Those based on moral principles
5. Social objectives

Corporate social responsibility (CSR) - is an approach under which businesses consider the
interest of all groups in a society as a central part of their decision making

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 - Concept where by organisations consider the interests of society by taking responsibility
for the impact of their activities on various stakeholders
(a) Benefits:
- Better employee recruitment and retention
- Sense of value/purpose for employees
- Boosts company's image/reputation
- Risk management against scandals, accidents, etc.
- Appeases pressure groups
- Brand differentiation and smoother operations
- Customer loyalty & goodwill
(b) Disincentives:
- High compliance costs can lower profits
- Forced to use materials that are specialised and may reduce profit
- Ethics are not universal or unchanging anyway
- Lower profits may decrease personal bonuses which may lead to
greediness
1. Attitudes change over time; acceptable practices before are unacceptable today.
2. CSR objectives adapt to changes in social norms/hot issues (i.e. tattoos, dyed hair,
jeans, single parents, gender bias, child labour, smoking, obesity, global warming, etc.)

1.4 Stakeholders

Business stakeholders - are groups or individuals who have an interest in a business/ affected
by the activities of a business. This means that shareholders are stakeholders but stakeholders
are not necessarily shareholders

- e.g. shareholder, employees, suppliers, customers, competition, government/state,

pressure groups, etc.
- Stakeholder Concept - priority to stakeholders rather than shareholders
- They may not have formal authority over a business but it may be in their business best
interest to that their needs in accounts when making decisions

1. Interests of internal stakeholders vs. interests of external stakeholders

(a) Internal
- Employees
1. Employment security, wage levels, conditions of employment,
participation in the business
- Managers
1. Employment security, salary and benefits offered, responsibilities
given
- Shareholders
1. Owners of shares in the company, have decision-making power,
receive dividends (share of profit)
2. Annual dividends, share price, security of investment
(b) External
- Suppliers
1. Speed of payment, level and regularity of orders, fairness of
treatment
- Customers

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 1. Value for money, product quality, quality of service
-Government
1. Job creation, tax payments, value for output produced, impact on
wider society/economy
- Special Interest groups (SIGs)
1. Banks, creditors, pressure groups, local community, trade/labour
union
2. Care about individual interests: payment of debts, environment,
etc.
(c) Competitors
- Fairness of competitive prices, strategic plans of the business

Stakeholder conflict

- Not possible to satisfy all stakeholders all the time

- Conflict will always arise from new developments, business activities, etc.

limitations of stakeholder conflict:

● Hinders Decision-Making: When stakeholders have opposing viewpoints, it can be

challenging to reach a consensus or make timely decisions. This can lead to delays,
missed opportunities, or suboptimal solutions that don't fully address any stakeholder's
needs.
● Damaged Relationships: Conflict can create tension and animosity between
stakeholders. This can damage trust,cooperation, and communication, making it harder
to collaborate effectively in the future.
● Increased Costs: Resolving conflict can involve time and resources, such as mediation,
negotiation training, or legal fees. These costs can eat into profits or project budgets.
● Reduced Morale: Conflict can create a stressful and unpleasant work environment for
everyone involved. This can lead to decreased employee morale, lower productivity, and
higher turnover.
● Public Image Issues: In some cases, stakeholder conflict can become public,
damaging the reputation of the organisation and potentially affecting customer trust or
investor confidence.
● Focus on Short-Term Solutions: When dealing with conflict, the emphasis may be on
finding short-term solutions to appease stakeholders, rather than focusing on long-term
strategic goals.

Additionally:

● Power Imbalances: Stakeholders don't always have equal power in an organisation.

Powerful stakeholders may be able to impose their will on others, even if it's not the best
solution for everyone involved. This can lead to resentment and a feeling of unfairness.
● Hidden Agendas: Stakeholders may have hidden agendas or motivations that are not
readily apparent. This can make it difficult to understand the true nature of the conflict
and find a solution that addresses everyone's needs.
● Lack of Transparency: A lack of transparency about decision-making processes and
stakeholder interests can exacerbate conflict. Open communication is essential for
building trust and finding common ground.

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- Stakeholder conflict resolution
- Arbitration
(a) To resolve industrial disputes between workers and managers
(b) Advantage
- Both sides agree to an independent arbitrator who will decide the decision
(c) Disadvantage
- Neither stakeholder group will likely receive what they want
- Decision is binding

- Workforce Participation
1. To improve communication, decision-making and reduce potential conflicts
between employees and managers
(a) Advantage
- Gain cooperation of workers
- better motivated and involved
(b) Disadvantage
- Waste of time and resources to be able to get all information

- Profit-sharing scheme
1. Reduce conflict between workers and shareholders over allocation of profits and
benefits
(a) Advantage
- Sharing profits can encourage workers to work in ways that will
increase long-term profit
(b) Disadvantage
- Reduces retained profits and/or profits paid out to shareholders
unless the scheme pays off

- Share-ownership scheme
1. To reduce conflict between workers, manager and shareholders
(a) Advantage
- Provides share options; employees and shareholders benefit and
aligns their interests with one another
(b) Disadvantage
- Administration costs, decreased ownership, qualification
constraints may limit motivation

- Stakeholder Map
1. A tool to analyze which stakeholders to prioritise for a given issue, mapped in a
grid classifying stakeholders in terms of interest and power

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1.5 growth and evolution

Internal and external economies and diseconomies of scale

Economies of scale - occurs when a unit of costs fall as the scale of of production increase

Diseconomies of scale - occurs when unit of costs increase as the scale of production
increases

Economies of scale

- Increase in efficiency of production as the number of output increases

- Average cost per unit decreases through increased production
- Fixed costs are spread over an increased number of outputs
- Cost per unit = (total variable costs + total fixed cost) ÷ units produced
- Importance: customer enjoy lower prices due to the lower costs which in turn increases
market share or business could choose to maintain its current price for its product and
accept higher profit margins

- Types of economies of scale:

Internal - achieved by the organisation itself

- Purchasing (bulk-buying) economies

- Wholesale discounts
1. Technical economies
- Investing in technology to reduce costs
2. Financial economies
- Easier for large companies to receive loans from banks
3. Marketing economies
- More efficient to advertise a large number of products
4. Managerial economies
- Larger firms are able to hire specialists who help improve efficiency

External

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 1. Improved infrastructure (e.g. transportation)
2. Advances in the industrial efficiency due to better training, innovations in
processes/machinery, etc.
3. Growth of other industries that support the organization

Diseconomies of scale

- Economies of scale have peaks, if this point is passed, diseconomies of scale are
experienced
- Can occur when a company or even the whole industry becomes too big and unit costs
begin to increase rather than decrease
- Possible due to:
1. Communication problems leading to poor coordination
2. Motivation problems
3. Overworked machinery and laborers
4. Alienation of workforce and slower decision-making (for larger businesses)

Reasons for business to grow

- By growing a business:
1. Business can get more power over suppliers and customers to help make more
profits
2. Business can benefit from internal economies of scale
3. A business can reach more customers and there is the possibility of more profit
through more sales
4. The owner can eventually own something that is worth more
5. Owners can have a sense of achievement
6. Business can raise its profile

Internal growth methods

- Try and grow sales of its existing products in its existing markets
- Develop new products for its customers
- To find new markets where it can sell its existing products

External growth methods

Merger - mergers and acquisitions are the combining of two or more firms into a single business
following an agreement by the firm's management teams and the shareholders

Takeover - occurs when a one company acquired complete control of another company by
purchasing more that 50% of its share capital against the will of the target companies board

Types of mergers and acquisitions and takeover

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 - Horizontal (one business joins with another business in the same stage and production
process eg: car manufacturer acquires another car manufacturer)
- Vertical (backward vertical integration occurs when the business joins with a supplier,
forward vertical integration occurs when the business joins closer to the customer such
as the distributor or retailer)
- Conglomerate diversification (occurs when a business joins with another business
operating in a different sector)

Joint venture - occurs when 2 or more business set up a new business with own legal identity
to collaborate on a specific activity

Strategic alliance - occurs when 2 or more business collaborate one a specific activity but
remain fully independent of each other, profit is split between both companies

Franchise - occurs when a franchisor sells the rights to use or his or her products to a franchise

- Franchiser provides marketing, training and equipment to set-up

- Support to ensure business will have a good chance of success, retain good brand
image, and maintain standard of product/service quality
- Franchiser may take a portion of profits and has a say on how the business should be
run

Franchisor

1. Benefits
- Grow cheaply and quickly
- Less manpower to directly manage
- Income from franchise fee, royalties, and supply purchases
2. Downside
- Not easy to revoke
- Less control over quality or performance of franchise
- Conflict in profit vs. volume

Franchisee

1. Benefits
- Known brand results in strong start-up sales
- Support from franchisor
- Easy financing options
- Lower cost of supplies because of economies of scale (though sometimes the
franchisor charges high for supplies)
2. Downsides
- Little freedom/flexibility in running
- Franchise/start up fee may be too costly
- Bad management in headquarters affects all branches
- Still not guaranteed success

Small vs. large organisations

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Importance of small businesses

- Small firms create jobs

- Small businesses are often run by dynamic and innovative entrepreneurs
- Provides competition for big business
- Supply specialists goods and services for specific industries
- Small firms can become big businesses in the future

Advantages

1. Small business
- Easily managed & controlled by the owner
- Quicker to adapt to changing customer needs and feedback
- Offer personal service to customers
- Establishes better employer-worker relationships
2. Large business
- Can afford to employ specialist, professional managers
- Benefit from more economies of scale
- More access to varied sources of finance
- Can diversify in several markets, thus spread out the risks
- Can afford more formal research & development

Disadvantages

1. Small business
- Can't afford to employ specialist, professional managers
- Doesn't benefit from more economies of scale
- Less access to varied sources of finance
- Can't diversify in several markets, thus spread out the risks
- Can't afford more formal research & development
2. Large business
- Difficult to be managed & controlled by the owner
- Slower to adapt to changing customer needs and feedback
- Can't offer personal service to customers
- Establishes poorer employer-worker relationships

1.6 multinational companies (MNCs)

Multinational company (MNC) - is a business organisation which has its headquarters in one
country but has operations in a range of different countries

Eg: ford, toyota shell oil company, google

- Very large organisations

- Operate a global strategy in terms of markets and facilities available throughout the
world
- A multinational company does not simply export to other countries, this is a business
operating internationally. A multinational has operational facilities overseas.

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Advantage of multinationals to host countries

- Economic growth and employment

1. Foreign direct investments
2. Effect of investment
- Helping poverty
- Promoting economic development
- Skills, production techniques and improvement in the quality of workforce
1. Bring new ideas
2. New techniques
3. Improve quality of production
4. Equality of human capital in the host country
- Availability of quality goods and services in the host country
- Improvements in infrastructure
1. MNC’s tend to invest into roads,rail,port and communications networks.
2. Provide better infrastructure for the host country and provide improved facilities
for small business
- Expand customer base beyond the domestic market
- Achieve greater economies of scale
- Work around government barriers imports
- Access to cheaper or more abundant raw materials and labour
- Spread risks in any one market through diversification

Impact on domestic businesses of a host country

- Increase competition which increases customer expectations

- Drive up expenses and costs for local businesses
- May dominate particular markets and distribution channels
- Allows local businesses access to foreign capital and shareholders
- Can provide R&D, and technological advancement for local businesses

Impact on economic & socio-political conditions of host country

1. Economical
- Foreign direct investments
- More options for consumers
- May threaten local industries
- Develop high-tech industries
- Balance of trade (exports > imports)
2. Employment
- Job creation with new skills
- Unemployment when workers are displaced in local industries
3. Sociological Impact
- Change of behaviour consumption patterns and lifestyle
4. Environmental Impact
- Utilisation of resources
- Increase waste
- Possible environmental degradation (leading to climate change)
5. Political
- Calls for stabler policies (e.g. deregulation, removal of trade barriers)
- Public-private sector partnerships

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Why do companies become multinational

- Develop a recognisable brand

- Sell in new markets
- Reduce transportation costs by producing nearer to markets
- Facilities in countries with low labour costs
- Reduces political risk

UNIT 2 HUMAN RESOURCE MANAGEMENT

2.1 Introduction to human resource management

Human resource management - is the process of making the most efficient use of an
organisation’s employees

Personal management - describes a range of discrete tasks necessary to administer human

dimension of business activities

Role of HR

- Carries a range of tasks

1. Recruiting employees
2. Training
3. Motivating employees
4. Seeking to prevent any conflict within the workforce
- Strategic management of employees
1. Contributes to the achievement of the organisation strategic objectives
2. Increasing market share
3. Attaining social objectives - maintaining employment in low-income countries

Managers can organisation achieve its objectives by carrying out the following roles

- Develop employees skills to meet the future needs of the organisation

1. Training
2. Recruiting most suitable employees
3. Offering current employees new roles (promotion)

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 4. Develop flexible work hours - organised to enable them to respond to changing
needs of the organisation
- Create and keep a loyal workforce
1. Employees who fit with the organisations needs and organisation culture ( the
values, attitudes and beliefs of the people working within a business)
2. Ensure employees are committed and find the job challenging
- Responding to changing external environments
1. Responsible for HR to respond to environmental changes such as the COVID-19
pandemic

Internal and external factors that influence human resource planning

Human resource plan/workforce plan - assess the current and future capacity of a
businesses workforce and sets out actions necessary to meet the businesses future human
resource needs.

Workforce/human resource planning

- Process of anticipating current and future demand for workers in both the short and long
term
- Deal with changes such the impact of technology or changes in consumers taste
- Lessens hiring mistakes at the cost of time and money
- Capital Intensity (i.e. use of machinery) (introduction to new machinery)
- Plan for employee retirement

A workforce plan includes:

- Careful consideration of current abilities and what will be needed in the future (short-
term or long-term)
- Identifying gaps and considering ways of addressing these
- Noting any training needs
- Developing training, recruitment and other personnel policies (e.g. appraisals, employee
welfare)

Considers labour demand of an organisation, which depends on:

- Historical data: average length of service, labour turnover rate, etc.

- Workload, specialisations and flexibility of workforce
- e.g. flexible workforce can deal with sudden shortage of staff
- Work study (time and motion study or efficiency studies)
1. Best number of people to complete a job efficiently
- Derived demand (from forecast output)
- Demand for labour depends on demand for product
- Natural wastage (ageing/retirement)

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How workforce planning is done

1) Corporate objectives
2) Demand for labour
- Number of workers requires
- Skills needed
- Location where employees required
3) Supply of labour
- Existing workforce
- Unused skills revealed through skills audit
- Changes in productivity and working practices
4) Recommendations
- Recruitment
- Training
- Redundancy
- Redeployment

Redeployment - occurs when an employee is offer suitable alternative employment within the
same business

Redundancy - takes place when an employee is dismissed because a job no longer exists

Internal influences on HR planning

- Corporate objective of maximising long term profits, HR must:

1. Focus on reducing labour costs
2. Effective use of the workforce
3. Significant amounts of recruitment
4. Possible training spending on skills needed ‘
- Flexi time : is a way of working which allows employees to fit their working hours around
their individual circumstances
1. Employees agree on core work hours
2. Has flexibility to fit in their reminder hours
3. Its can develop employee loyalty as it caters to employees needs
4. Helps maintain skilled and experiences workforce - this reduces need to plan for
recruitment and training
5. Makes it easier for business to meet customers needs
- Type of product sold
1. Businesses product that requires the commitment of a highly skilled labour force
- Need for training
- Developing employees talents
2. Business mainly producing using machinery
- HR minimises labour costs/fewest employees

External influences on HR planning

- Demographic change (demography is the study of human population)

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 1. Size and make-up of population has important implications for planning future
workforce
- Increase in population
- Rate of growth
- World population is ageing
2. Affect demand for good and services
- If Birth rates remain high demand for products associated with younger
people will increase
- Pattern of consumer spending will change on consumer age
3. Managers need to consider these changes when planning in terms of number of
employees and their ability to produce particular products
- Immigration
- Migration is the movement of people between different countries
1. Immigration takes place when a person moves to live in a different country
- Young people moving to different countries increases labour force
- Immigration activities of HR planners depend on immigrants skills not
ability to speak foreign languages
- Change in labour mobility
1. If labour is mobile, without too much hindrance employees can move jobs to
different occupation or different areas
2. Labour mobility; refers to the ability of people to move to jobs in different area or
occupations
- Geographic mobility of labour: is the ability and willingness of people to
move to jobs in different areas with the same occupation
- Occupational mobility of labour: is the ability and willingness to move to
jobs in different occupations
- Any change in labour mobility, managers are responsible for preparing
HR plans
- improved geographic labour mobility = greater supply of labour for
businesses in a specific area
1. This change can reduce the need to redeploy as the they may has
suitable skills
2. Encourage HR to use employees rather technology in the
production process increasing recruitment and training
- Occupational labour improves = HR planners increase recruitment and
reduce resources devoted to training
- Gig economy
1. The gig economy is a labour market in which short terms contracts or freelance
work are common as opposed to permanent jobs
2. Often involves connecting with clients or customers through online platforms,
3. Benefits of the Gig Economy for Businesses: Controlling Labour Costs
- Businesses only pay gig workers for the work they do, eliminating the
need for salaries, benefits packages (healthcare, vacation pay, etc.)
associated with full-time employees.
- Flexibility: Gig workers allow companies to scale their workforce up or
down quickly based on demand fluctuations, ensuring they have enough
labour for peak periods without unnecessary costs during slow times.
- Matching Supply and Demand: This flexibility helps businesses align their
workforce with customer needs,avoiding situations with idle employees or
insufficient staff.

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 - Enhanced Price Competitiveness: By controlling labour costs, businesses
operating in the gig economy can potentially offer more competitive
pricing to their customers
- Challenges:
1. Legal Classification: The growing gig economy raises questions
about worker classification (employee [Link] contractor),
potentially leading to legal disputes.

Impact of Technology:

- Labour Replacement: Technology allows replacing workers (e.g., robots in

manufacturing) - affects recruitment and redundancy planning.
- Remote Work: Growing trend (e.g., post-pandemic) - HR plans need to adapt for fewer
physical offices and different skill sets (managing technology).
- Customer Experience: Technology like online banking impacts HR by requiring training
to meet customer needs in a tech-driven environment.

Impact of Economic Environment:

- Economic Growth: Rising demand leads to increased need for labour - HR plans focus
on recruitment and training.
- Economic Downturn: Falling demand may necessitate workforce reduction - HR plans
may involve redundancies and redeployment.
- Specific Industry Examples:
1. Travel & Tourism: Post-pandemic recovery may require increased staffing - HR
plans focus on recruitment and training for safe operations.

Reasons for resistance to change

- Self-Interest: Fear of losing out: bonuses, jobs, status. Lack of skills or knowledge for the
new way.
- Comfort Zone: Preferring the familiar. Disliking the hassle of new methods.
- Disagreement: Believing the change is wrong or has a better alternative.
- Misunderstanding: Not seeing the need for change or the bigger picture.

HR Strategies for Reducing Resistance to Change:

- Education & Communication: Explain the "why" behind change, fostering understanding
and buy-in. (Slow approach)
- Facilitation & Support: Provide necessary equipment, training, and emotional support to
help employees adapt.
- Participation & Involvement: Engage employees in the process, increasing commitment
but potentially causing delays.
- Manipulation & Co-option: Win over key influencers to gain broader employee support.
- Negotiation & Bargaining: Offer incentives like higher wages for increased productivity
during change.
- Rewards: Recognize and reward employees who embrace the change.

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 - Explicit & Implicit Coercion: Force change through threats like layoffs, but risks
employee resentment. (Fast, but risky approach)

2.2 organisational structure

1. Organisational Structure
- Way in which the company is organised and the consideration of its internal
workings in an attempt to find an efficient operational practice
- Provides accountability/authority (who is answerable for a specific job) and
responsibility (who is in charge of whom)
- Necessary for: stability, consistency, continuity, unity, efficiency, etc.
- Routes for communication

Authority: is the power to control stations of the decisions and actions of others

Responsibility: is the duty to complete a task and to be accountable for one's actions

2. Organisational chart
- Are used to visually represent the internal structure of an organisation
- Shows different functional departments, chain of command, span of control, and
channels of communication
- Levels of hierarchy
- Ways to structure a business:
1. By function: production process (e.g. editing, printing, sales, etc)
2. By product or activity: organising according to the different products made
3. By area: geographical or regional state
- Role of Organisational Chart
1. Visual representation of business – see main line of communication
2. Shows promotion prospects
3. Shows immediate superior for clear communication
4. Shows employees their role in the business
5. Shows who to pass info to given a problem

The different types of organisational structures

Delegation

Is the passing down of authority through an organisation

Extent a superior passes work down the hierarchy to subordinates

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 (a) Advantages
- Delegation can improve the motivation levels of junior employees. This can
improve labour productivity and reduce rates of labour turnover
- Can speed up and improve the quality of decision making. Decisions may be
made by employees who are close to customers and have a better
understanding of their needs without having to refer decisions to managers
- Can reduce the workloads of senior or middle managers, allowing them to focus
on key tasks and to improve their performance
- Improves the skills of junior employees and prepares them for more senior roles
in the organisation
(b) Disadvantages
- The costs of training; delegation may require a business to spend heavily on
training employees to ensure that have the necessary skills
- It may be inappropriate in some organisation where leadership styles are
authoritarian and managers may be unwilling to pass control to junior employees
- Not suitable strategy to adopts to manage a crisis, such situation would require
rapid decisions by experiences senior managers
- May lead to confusion and inadequacy (in case of failure)
- This includes accountability but responsibility still stays with higher authority

Delegation Checklist (SMARTER)

- Specific – tasks clearly defined

- Measurable – quantifiable results
- Agree – on amount of power and freedom
- Realistic – depends on the ability to carry out the task
- Time Bound – task completion
- Ethical – tasks fairly delegated
- Recorded – documented

Span of control

Is the number of subordinates directly responsible to a manger

- Affects whether an organisation is wide/flat or narrow/tall

- Factors:
1. Manager’s experience, competence, traits
- Nature of management styles (amount of control needed)
- Skills and dynamics of subordinates (better team, less people)
- Nature of work
- Type of production method used

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 2. Wide/flat organisations – wide span of control
- Direct communication between different levels (fast and accurate)
- Cost control (less managers needed)
- Delegation is more important
- Longer decision making
- Eliminate feeling of alienation of workers from senior management
3. Narrow/tall organisations – narrow span of control
- Easier to control smaller amount of subordinates
- May be more productive/efficient (team cohesiveness and specialisation)
- Fast communication within team
- More costly (more managers needed)
- More motivation for employees – many promotion opportunities

Levels of hierarchy

Refers to the number of layers of authority within an organisation. That is the number of layers
that exists between the chiefs executives and a shop floor employee

- Organisational structure based on rank

- Shows clear lines of communication
- Establish departments or teams (motivation and sense of belonging)
- BUT
1. Rivalries may occur
2. Rigid in terms of scope and authority
3. Response to change may be slower
4. Departmentalization

Delayering/downsizing

- Process of removing levels in the hierarchy/reducing managerial levels

- Achieves flatter structure for more flexibility

Advantages

- Reduce costs
- Improve speed of communication
- Encourage delegation

Disadvantages

- Can cause job insecurity, demotion, redundancy

- Overstretching of employees
- Costs to train employees

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Chain of command

Is the line of communication and authority existing within a business, thus a shop floor worker
reports to a supervisor who is responsible to a departmental manager and so on.

- Shows hierarchy and control: Who reports to whom.

- Impacts communication flow: Number of layers messages travel through.
- Tall structures:
1. Long chains of command.
2. Communication issues (distortion, delays).
- Flat structures:
1. Shorter chains of command.
2. Improved communication (faster, clearer).
- Efficiency: Long chains reduce efficiency (communication & decision-making).

Bureaucracy

Is a system under which an organisation uses complex rules and procedures which can cause
slow decision making and may reduce its efficiency

- Set of detailed methods and routines to carry out a specific activity.

- Involves clear division of roles for a hierarchical system in the organisation
- Follows several principles:
1. Prioritisation of continuity (less risk)
2. Rules and regulations
3. Formal hierarchy
4. Accountability

Advantages

- Authority and levels of responsibility are obvious

- Standardisation of processes to ensure efficiency
- Turns employees into specialists rather than generalists
- Loyalty to department

Disadvantages

- May stifle creativity

- Rivalries between departments may ensue
- Less job satisfaction; high labour turnover
- Slow decision-making process

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 - Salaries for the different layers of management increases costs

Centralization and decentralisation

- Centraislies organisation: are ones in which managers hold the greatest decision
making power
- Decentralised or decentralisation organisations: give greater decision making power to
employees further down the organisational structure

Centralised structures

- Decisions made by senior management.

- Faster decision-making.
- Ensures alignment with senior management objectives.
- Advantages
1. Rapid decision making on single projects
2. Better control over all company activity
3. Better sense of direction
4. Suited for smaller businesses
5. Decisions are more consistent
- Disadvantages
1. Slow decision making on multiple projects
2. Stress for senior staff
3. Inflexible
4. Demotivating
5. Exclusion of other people’s ideas that may be better

Reasons for Centralization:

- Management Control: Preference for control and major decision-making by senior

management.
- Employee Skill Level: Centralization may be better for low-skilled employees.
- Purchasing Economies: Centralised buying decisions can lead to cost savings.

Decentralised structures

- Empowers lower-level employees.

- Quicker decisions closer to customers.

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 - Increased employee motivation.
- Requires good communication and clear goals.
- Some decision making is delegated
- Freer communication process
- All employees get to have a pitch in the decisions

Advantages

1. Input from employees

2. Speedier decision making
3. Improved Morale
4. Accountability
5. Teamwork

Disadvantages

1. No control
2. Greater chance of mistakes
3. Reliance on communication
4. Redundancy
5. Lower standards of work (no governing body)
6. Inconsistency between company goals (regional managers)

Matrix structures

- Task-Oriented & Team-Based: Aims to address limitations of traditional structures.

- Combines Hierarchy & Project Teams: Uses departments and cross-functional project
teams.
- Focus: Completing specific projects (new product launch, opening stores, etc.).
- Advantages:
1. Focus on business-critical tasks.
2. Increased flexibility and customer responsiveness.
3. Motivates and develops employees with challenging tasks.
- Disadvantages:
1. Divided loyalties due to dual reporting (project & department managers).
2. Potential conflicts between managers, hindering performance.
3. High costs associated with supporting multiple projects.

Informal organisational structures

- No clear hierarchy or reporting structure.

- Common in professional teams (lawyers, doctors).
- Advantages:
1. Autonomy and decision-making for professionals.

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 - Disadvantages:
1. Lacks coordination and control from senior management.

Types of organisation charts

Tall or vertical

- Many Levels: Hierarchical with narrow spans of control.

- Clear Roles: Defined roles and reporting structures.
- Centralised Decisions: Top-down decision making by senior management.
- Career Progression: Clear paths for promotion.
- Slow & Bureaucratic: Decision making can be slow and inflexible.
- High Costs: Large management structures can be expensive.
(a) Advantages
- Authority and responsibility are clearly establishes
- Promotion is available and may motivate junior employees
- Junior employees may receive more support from managers, improving
performance
(b) Disadvantages
- Organisation can be slow to respond to changing customer needs
- Communication may be slow and ineffective, especially horizontally
- Multiple layers of management can increase labour costs

Flat or horizontal

- Few Levels: Less hierarchy with wider spans of control.

- Decentralised: Decision-making spread throughout the organisation.
- Delegation: More reliance on delegation due to larger teams.
(a) Advantages
- May offer junior employees interesting jobs with delegates authority
- Motivation and productivity can be high
- Fewer managers may reduce labour costs and increase price competitiveness
(b) Disadvantages
- Managers may be overwhelmed with too many subordinates
- High training costs may result from need to delegate
- May force a large and growing business o divide into smaller divisions

By product or by function or by region

- Functional:
1. Based on departments (marketing, finance, etc.).
2. Advantages: Expertise & innovation within departments.
3. Disadvantages: Poor coordination, departmental competition for resources.
- Regional:
1. Based on geographic regions (countries, continents).
2. Common for global businesses.
3. Useful for catering to specific regional needs.

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 - Product:
1. Based on products or brands.
2. Advantages: Employees focus on specific customer needs, motivation, and
loyalty.
3. Disadvantages: Decisions made without considering overall business objectives.

Appropriateness of different organisational structures given a change in external factors

Responding to a Changing Environment: Businesses need to adapt their structures to address

external factors.

Impact of Technology:

- Decentralisation: More data allows for informed decision-making at lower levels.

- Flatter Structures: Faster response to customer needs through social media.
- Team-Based Structures: Effective response to customer issues on social media.

Impact of Competition:

- Adaptable & Flexible Structures: Respond to changing consumer demands and product
innovation.
- Decentralization & Delegation: Empower employees to better understand and meet
customer needs.
- Centralization (for Price Competition): Standardised operations and bulk buying to
minimise costs.

Impact of Economic Changes:

- Decentralisation (Economic Boom): Difficult to control large, growing organisations

centrally.
- Centralization (Economic Downturn): Cost reduction through bulk buying and
standardised procedures.

Changes in organisational structures

Importance: Businesses need structures that can respond to external pressures.

Characteristics:

- Continuous Change: Adapts to meet evolving needs. Employees embrace change.

- Customer Focus: Teams may be formed and disbanded based on customer demands
- Contingency Workforce: Uses consultants, temporary/part-time workers for specific skills
or demand fluctuations.

Handy's Shamrock Organization: A Model for Flexibility

- Core Workers: Highly skilled, permanent full-time employees for critical tasks.
- Peripheral Workers (Part-Time/Temporary): Less critical roles, enable production
adjustments or provide specialist skills.
- Contract Workers (Self-Employed): Used for specific projects.

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Advantages:

- Responds effectively to changing customer demands and sales fluctuations.

- Matches production capacity to customer needs.
- Maintains price competitiveness (avoids unnecessary labour costs).

Disadvantages:

- Insecure employment and low loyalty for peripheral workers.

- Potential for indifferent customer service from unmotivated peripheral workers.

Project-Based Organizations (PBOs):

- Suitable for industries with constant change (construction, film, advertising).

- Advantages:
1. Efficiency: Effective resource allocation for high-quality, on-time projects.
2. Responsiveness: Adapts to changing customer needs continuously.
3. More Opportunities: Improved products and services drive innovation and attract
customers.
4. Employee Performance: Motivation through varied projects and skill
development.
- Disadvantages:
1. Isolation: Employees on long-term projects may feel isolated from others.
2. Communication Issues: Limited communication between teams hinders
knowledge transfer.
3. Negative Employee Impact: Constant team shifts and skill repetition limit
development and career progression.
4. Loyalty Conflicts: Divided loyalties due to reporting to both functional and project
managers.

2.3 leadership and management

Scientific and intuitive thinking/management

Scientific management- is based on the use of data and employs a logical rational approach to
management and decision making
- Data-Driven Approach: Analyses data before making decisions (rational, logical).
- Steps:
1. Identify problems/opportunities.
2. Set objectives.
3. Define decision criteria (how important each one is)
4. Develop and evaluate alternatives.
5. Choose and implement a course of action.
6. Review decision effectiveness.
- Advantages:

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 1. Reduces risk through informed decisions.
2. Useful for major decisions.
- Data Collection:
1. Internet, customer surveys, business records.
2. Technology facilitates data collection and analysis (e.g., loyalty cards).
- Limitations:
1. Cost-benefit analysis: weigh benefits vs. data collection costs.
2. Data reliability: new products, customer uncertainty.
3. Steve Jobs quote: customers may not know what they want.

Intuitive management- occurs when managers rely on their instinct and their experience rather
than data, when making decision and solving problems

- Relies on gut instinct for decision-making.

- Suitable when:
1. Data is unavailable or unreliable.
2. Assessing personality/character (business partner).
3. Evaluating advertising effectiveness for new products.
4. Insufficient quantitative data or conflicting data exists.
5. Quick decisions are necessary.
- Examples:
1. Richard Branson: "Gut feeling" for starting businesses.

Management and leadership

Management- is planning organising directing and controlling all or part of a business

enterprise

Leadership- includes the functions of ruling, guiding and inspiring other people within an
organisation in pursuit of agreed objectives

The functions of management - all these follow the companies objectives

- Planning
1. Establishes the direction for the organisation. Setting the course for the
organisations future
2. It is the basis for Other Functions: organising, leading, and controlling.
- Key Steps:
1. Set objectives and targets: Defining what the organisation wants to achieve, both
overall and for specific areas.
2. Conduct analysis, basically gathering information through forecasts, competitor
research, market analysis, and understanding the business environment
3. Develop functional area plans: Creating detailed plans for departments like
finance, human resources, and marketing, ensuring alignment with overall
objectives.
4. Estimate resource needs: Determining the resources (personnel, equipment,
finances) required to execute the plans effectively.
- Planning is continuous process it adapts to changing external factors

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- Benefits of Planning:
1. Reduced Project Failure Risk: By identifying potential problems early on,
planning helps managers develop solutions to mitigate risks and increase project
success rates.
2. Ensuring Resource Availability: Planning helps anticipate the resources needed
to execute plans and allows managers to acquire them in advance, preventing
delays or disruptions.
3. Preparedness for Emergencies: Contingency plans, developed during the
planning process, equip the organisation to handle unexpected events or crises
effectively, minimising potential damage.
4. Helps managers identify options and choose the most suitable course of action.
- Organising
- Following the Plan: Organizing translates the goals set in planning into a functional
structure.
- Key Aspects:
1. Organisational Structure: Defining the hierarchy, departments, and reporting lines
within the organisation.
2. Resource Allocation: Assigning personnel, equipment, finances, and other
resources to carry out tasks.
3. Relationship Management: Establishing clear communication channels and
collaboration between departments and individuals.
- Example: Ford's New Factory in Argentina
1. Resources Needed:
- Land for the factory.
- Skilled employees to operate the factory.
- Funding (approximately $580 million) for construction.
2. Effective Management:
- Ford will need to carefully plan resource acquisition to minimise costs and
achieve its goals.

- Directing
- Function: Directing influences and oversees employee behaviour to achieve company
goals
- Key Elements:
1. Motivation: Inspiring employees to achieve goals through:
- Financial incentives.
- Empowerment and decision-making authority.
2. Communication: Effective information exchange for:
- Clear guidance.
- Recognition and praise.
- Problem-solving encouragement.
- Benefits:
1. Increased Productivity: Motivated and well-informed employees perform better.
2. Improved Initiative: Empowered employees take ownership and solve problems.

- Controlling

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 - Function: Ensuring the organisation achieves its goals by tracking progress and making
adjustments
- Key Steps:
1. Setting Standards: Defining performance expectations based on company
objectives.
2. Monitoring Performance: Regularly reviewing actual performance against set
standards.
3. Reporting: Communicating performance data to stakeholders (investors,
managers, employees).
4. Taking Action: Implementing corrective or preventive measures to address
deviations from plans.
- Benefits:
1. Achieving Objectives: Ensures the organisation stays on track to meet its goals.
2. Identifying Problems: Detects issues early on, allowing for timely intervention.
3. Continuous Improvement: Provides insights for refining plans and processes.

Leadership
- Leadership
1. Process of influencing and inspiring others to achieve goals (usually with broad
goals and no time frame)
- Management
1. Process of problem solving and decision making as well as planning, organising,
budgeting, and controlling (usually with specific goals and definite time frame)
- Time and devotion – leadership is a 24 hour job
- Roles and responsibilities – leaders innovate, managers administer
- Influence on others – leaders uses emotion, managers rationalise
- Vision – leaders have them

Key Qualities in leaders

1. Vision: Providing a clear direction for the future of the business.

2. Decision-Making: Making tough choices and driving change.
3. Inspiration: Motivating and rallying others to achieve goals.

Leader Duties:

1. Creating and Adapting Vision: Setting a long-term direction and adjusting as needed.
2. Setting Objectives: Establishing goals to move the organisation forward.
3. Providing Expertise: Demonstrating knowledge and problem-solving skills.
4. Shaping the Organization: Defining structure, communication channels, and culture.
5. Role Modelling: Setting an example for others to follow.

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Leadership styles

1. Autocratic (authoritarian)
- Makes all decisions, doesn’t delegate tasks or responsibility
- Appropriate when workers are unskilled, unmotivated and quick decisions need
to be made
- No feedback from subordinates as their opinions/suggestions are ignored
(alienates workforce), one way communication
- Lack of information, so subordinated are highly dependant on leaders,
supervision needed
2. Democratic
- Involves subordinates in decision-making process
- Better morale and motivation among employees, better decisions
- Appropriate when manager can’t always be around, employees are competent
- Not suitable for very large workforce
- Decision-making may take a long time
- 2 way communication
3. Laissez-faire
- Decision-making and authority is delegated
- Causes high morale/motivation among subordinates
- Appropriate for situations where creative ideas are important, subordinates are
competent, skilled, and motivated
- Decision making and time taken to accomplish tasks may take long due to lack of
supervision
- Communication is mainly between people at the same level in the organisation
through little occurs
4. Paternalistic
- Authoritarian, but with some consideration for employee well-being.
- Decision-Making:
1. Leader retains control.
2. Minor consultation with subordinates
- Employee Viewpoint:
1. Seen as an extended family.
2. Social and leisure needs addressed
- Benefits:
1. Loyalty and low turnover.
2. Reduced recruitment costs and improved competitiveness
- Drawbacks:
1. Stifles creativity and initiative.
2. Underutilised employee potential.

Situational Leadership- exists when a leader adjusts his or her type of leadership to best
suits a particular situation or task

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 - Key Idea: There's no one-size-fits-all leadership style
- Focus: Matching leadership style to the situation and followers.
- Factors Affecting Situations:
1. Follower Characteristics: Skill level, confidence, experience.
2. Task Characteristics: Clarity, structure, difficulty.
3. Organisational Goals: What needs to be achieved.
- Fiedler's Contingency Model:
- Leader Styles:
1. Task-Oriented: Focused on task completion, building teams for results.
2. People-Oriented: Builds relationships and maintains harmony.
- Situational Favorability:
1. Leader-Member Relations: Trust, confidence, willingness to follow.
2. Task Structure: Clarity of goals and instructions.
3. Leader's Position Power: Ability to reward and punish.
- Effectiveness:
1. Task-Oriented leaders best in:
- Favourable situations (good relationships, clear tasks, high power).
- Unfavourable situations (poor relationships, unclear tasks, low power).
2. People-Oriented leaders are best in moderately favourable situations.

2.4 motivation and demotivation

Motivation- describes the factor that arise, maintain and channel behaviour towards a goal

Demotivation- exists when an employee has no interest in or enthusiasm for their work

- Employer objectives
1. Motivation
2. Minimise cost
3. Prestige
4. Better recruitment
5. Reduced labour turnover
6. Control
- Employee objectives
1. Purchasing power
2. Recognition
3. Compensation – high direct earnings, pensions, fringe benefits

Motivation theories

Content theories - what motivates people and are concerned with individual needs and goals

Process theories- the process of motivation and are concerts with how motivation occurs

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Taylor’s Theory

- Principle of scientific management

1. Workers are motivated by cash
2. Productivity can be improved by relating output/productivity to pay
- Division of labour and specialisation
1. Standardisation of work practice (seen in production lines)
2. Workers should be chosen for their job based on ability
- Differentiated piecework
1. Payment based on standard level of output
2. Paid extra for output beyond that level
- Criticisms
1. Ignored non-financial motivators
2. Non-physical contribution may not be quantified
3. Repetitive and monotonous work – job dissatisfaction

Maslow’s Hierarchy of Needs

- Argues that employees have a series of needs they seek to fulfil. Individuals strive to
satisfy needs further up in the hierarchy
- People have 5 basic needs:
1. Physiological/basic
- Food, water, shelter
- Through pay and a warm dry working environment
2. Security/safety – predictability and order
- Satisfied by job security, maternity leave, fringe benefits
3. Social/love/belonging
- Satisfied by team working, anti-discrimination
- Contact and friendship with other employees
4. Esteem/ego
- recognition and self-respect and achievement
- Satisfied by training and development, delegation, promotion
5. Self-actualisation
- Satisfied by giving freedom to employees/fulfil one's potential
- Needs must be satisfied from the bottom up (basic to self-actualisation)
- Criticisms
1. Needs cannot be quantified
2. Ignores individuality of needs

Herzberg’s Theory

- Two factors affected motivation

1. Hygiene/maintenance factors (physical)
- Factors that meet basic needs

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 - Does not motivate but demotivates if not met
- Working conditions
- Salary
- Relationship with fellow workers
2. Motivators (psychological)
- Achievement, recognition, responsibility, and advancement leads to
higher satisfaction
- Interest in the work itself
- Democratic management style must be used
- Involves job enlargement, enrichment, empowerment (see below)
- Movement vs. motivation
1. Movement – doing something because it needs to be done
- Based on extrinsic motivation
2. Motivation – doing something because you want to
- Based on intrinsic motivation
- More important
- Criticisms
1. Does not apply to low-skill, low-wage jobs
2. Some workers may not like the increased workload in job enrichment

McClelland’s acquired needs theory

- Individuals motivation depends upon their needs and that these needs are determined
by the individual's experiences
- Key Points:
1. Three Needs: Achievement, Power, Affiliation
2. Need Combination Shapes Behaviour: Needs influence employee motivation and
management style.

The Needs:

- Achievement: Desire for excellence, challenging goals, and feedback, need a sense of
accomplishment
- Power: Desire to influence and control others.
1. Two Types:
- Personal Power: Undesirable, focuses on self-gain.
- Institutional Power: Positive, focuses on organisational goals.
2. Needs: Influence, status, control.
- Affiliation: Desire for connection and social interaction.
1. Works Well In: Teams, marketing, sales, customer service.
2. Needs: Acceptance, teamwork, social interaction.

Implications for Managers:

- Assign tasks and roles that fulfil dominant needs.

- High need for achievement: Provide challenging tasks, regular positive feedback.
- High need for power (Institutional): Offer leadership roles with control over others.

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 - High need for affiliation: Encourage teamwork and opportunities for social interaction.

Criticisms:

- Oversimplification: Ignore other factors influencing motivation.

- Difficult to Measure Needs: Accurately assessing dominant needs can be challenging.
- Cultural Differences: Need importance may vary across cultures.

Deci and Ryan’s self determination theory

- People are most motivated when their basic psychological needs are met
- Focus: Self-determination (feeling in control) leads to motivation.
- Key Assumption: People seek personal growth through challenges and new
experiences.
- Three Fundamental Needs:
1. Autonomy: Independence and self-control.
2. Relatedness: Connection and belonging with others.
3. Competence: Feeling capable and effective.

Motivation and Needs:

- Fulfilling these needs leads to:

1. Well-being and motivation.
2. Development of self-determination.

Types of Motivation:

- Extrinsic: Driven by external factors (money, rewards, punishment).

- Intrinsic: Internal desire to learn, grow, and achieve (most desirable).

Criticism:

- Overly simplistic: Doesn't consider all motivational factors.

- Needs fulfilment may be subjective: What fulfils needs for one person might not for
another.

Adam’s Equity Theory

- Motivation hinges on perceived fairness in the workplace

- Employees compare their inputs to their outputs
- Reward is equal to effort then employees are satisfied
- Social comparison, if they feel the output is not equal to input they will look for balance
- Underpayment equals demotivation
- Overpayment equals guilt
- They distort to restore equity

Employer must communicate and compensate and fix reward systems

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 - Factors : value of money, gender gap, culture and personal factors

Criticism

- No disclosure of salary because of social comparison

- Subjective theory
- Fairness cannot be quantified
- Disclosure of reward then how is social comparison done?

Victor Vroom's expectancy theory

Motivation is a function of:

- Expectancy: the belief that effort will lead to performance.

1. Low expectancy = demotivation.
- Instrumentality: achieving desired performance will lead to desired reward
1. Strong link between actions and rewards increases motivation.
- Valence: the value the person places on the reward.
1. Highly desired outcomes are more motivating.

Criticism:

- Assumes universal motivation and neglects personal values and contexts

- Can't measure each component
- Ignores broader organisational factors influencing motivation
- Accurately assessing expectancy, instrumentality, and valence can be challenging.

Labour turnover

Labour turnover- Rate at which employees leave a company within a period (usually a year).

Formula: Number of employees leaving / Average number of employees employed x 100

Example: Company with 2,000 employees and 190 leaving annually has a 9.5% labour
turnover.

Labour turnover = 190/2000 x 100 = 9.5%

Causes:

- Low wages and poor training (demotivation)

- Ineffective recruitment (hiring unsuitable employees)

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 - Redundancy (job elimination)
- Retirement

Why do managers seek some level of labour turnover:

- Balance: New ideas and recruitment costs.

- Privately owned businesses tend to have higher labour turnover rates
- Public sectors have lower rates
- Costs of High Turnover:
1. Recruitment and training expenses.
2. Disruption of teams and customer service.
- Acceptable Rate: Depends on industry and skill level.
1. High-skilled positions: Lower desired rate.
2. Seasonal, low-wage jobs: Higher acceptable rate (e.g., theme parks).

Interpreting Data:

- High turnover can be costly and disruptive.

- Low turnover (highly skilled positions) may stifle innovation.

Types of appraisal

Appraisal- is the regular process of considering and evaluating the performance of an individual
employee

- Formal reviews to assess employee performance over a period (e.g., a year).

- Survey: 80% of companies use formal appraisals (World at Work, 2018).

Process:

- Typically involves a manager-employee interview.

- Reviews evidence of employee performance.
- Sets goals for the future.
- May involve self-appraisal and 360-degree feedback.

Purposes:

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 - Provide feedback on past performance.
- Self-assessment for employees.
- Identify and remove performance barriers.
- Plan for skill development and training.
- Inform decisions on pay and rewards.
- Support career planning and development.

Formative appraisal - are planned and continuous processes encouraging managers and
employees to communicate effectively and to discuss those aspects of the employees work
which have been successful and those that may have room for improvement and how this may
be achieved.

- Focus: Continuous improvement through ongoing feedback and development.

(a) Advantages:
- Increased Motivation: Regular feedback helps employees stay engaged and
motivated.
- Improved Performance: Focus on development leads to skill improvement and
better results.
- Stronger Manager-Employee Relationships: Open communication fosters trust
and collaboration.
(b) Disadvantages:
- Time Commitment: Requires frequent meetings and ongoing communication.
- Manager Training: Managers need effective communication and development
skills.
- Documentation Burden: Tracking progress and feedback can be time-consuming.

Summative appraisal - describes and records an employee’s achievement and performance at

work over a period of time

- Focus: Evaluating past performance and setting future goals.

(a) Advantages:
- Clear Accountability: Employees understand expectations and are held
responsible.
- Performance Measurement: Benchmarks help assess individual and team
effectiveness.
- Decision-Making: Data informs decisions about promotions, pay, and
training.
(b) Disadvantages:
- Limited Development Focus: Primarily backward-looking, may miss
opportunities for improvement.
- Stressful for Employees: Focus on past performance can be
demotivating.
- Potential Bias: Subjective evaluations can be unfair or inaccurate.

360 degree feedback - is an approach to appraisal in which an individual receives information

about their performance at work from a range of people with whom they work, such as a junior
and senior colleagues, customers and suppliers

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 - An appraisal method that gathers feedback from a wider range of sources than just the
employee's manager.
- Can include: Senior managers, subordinates, external contacts, and previous
performance reports
- Advantages:
1. More Rounded View: Provides a broader perspective on employee performance.
2. Objectivity: Can be perceived as fairer due to multiple viewpoints.
3. Increased Trust: Can foster trust if implemented effectively
- Disadvantages:
1. Trust Issues: Employees may be wary of feedback from colleagues.
2. Focus on Perception: Captures perceptions of behaviour, not necessarily skills.
3. Managerial Role: Managers need to address skill gaps identified by others.

Self appraisal- is which a technique in which employees evaluate their own performance at
works by identifying their strengths and weaknesses

- Employees assess their own strengths, weaknesses, and contributions.

- Often completed through online or paper forms
a) Advantages:
1. Improved Communication: Encourages self-reflection and focused
discussions with managers.
2. Reduced Bias Perception: Employees feel their voice is heard in the
process.
3. Increased Motivation: Reflecting on contributions can boost self-
motivation.
4. Broader Manager Understanding: Provides insights beyond a manager's
direct observation
b) Disadvantages:
1. Potential for Bias: Employees may overstate strengths or downplay
weaknesses.
2. Manager Awareness: Less effective if managers lack knowledge of the
employee's work
c) Improving Effectiveness:
1. Training: Guide employees on completing self-appraisal forms accurately.
2. Structured Forms: Well-designed forms encourage objective self-
assessment.

Criticisms of appraisal

- They focus on employees past performance with too little attention on developing and
improving future performance
- They are not conducted frequently enough
- Judgements made of employee performance can be too subjective
- They can be constantly in terms of employee time and have little impact on employee
performance

Methods of recruitment

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Recruitment and selection- is the process of filling an organisations job vacancies by
appropriate new staff

The process of workforce planning in which a business analyses its expected future labour
needs and compares this to its current workforce, may identify the need for new employees.

Process of recruitment and selection

1. Use HR plan to decide number and type of employees needed

2. prepare , job adverts, job descriptions, person specification
3. Advertise inside the business (internal recruitment)
4. Advertise outside the business (external recruitment)
5. Receive job applications
6. Prepare shortlist for selection, matching applications and person specification
7. Select employees using interviews, etc.

Job description- list the duties and responsibilities associated with particular job

- Focus on the position and its requirements.

- Typical content:
1. Title of the post
2. Employment conditions
3. Tasks and duties
4. Key aims and responsibilities
5. Position within the organisation
- Benefits:
1. Employers:
- Clarify job requirements and structure.
- Set performance targets.
- Develop interview questions.
2. Employees:
- Decide if the job is a good fit (tasks, enjoyment, skills required).

Person Specifications- outlines the skills, knowledge and experience necessary to fill a given
position successfully

- Focus on the ideal candidate for the position.

- Typical content:
1. Educational qualifications
2. Professional qualifications
3. Character and personality traits
4. Skills and experience

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 - Benefits:
1. Organisations:
- Compare applicants against desired criteria.
- Identify best-fit candidates for interviews.

How managers recruit

- Job advertisements
- Employment agencies
- Online recruitment
- Employee headhunts

Methods of selection

- Because of high costs resulting from recruiting the wrong people, firm are investing more
resources and time in the recruitment and selection process
- Screening Tools:
1. CVs/Résumés: Briefly summarise skills, experience, and education.
2. Application Forms: Standardise information collected from all candidates
3. Benefits:
- Efficient Screening: Helps shortlist potential candidates for further
evaluation
- Comparison: Standardised formats allow easy comparison of applicants.
- Interviews:
1. Common and Flexible: Allow two-way information exchange.
2. Unreliable: Interview performance may not reflect job performance.
- Reference Checks:
1. Additional Insights: Provide another perspective on the candidate.
2. Potential Bias: References may not always be accurate.
- Testing:
1. Psychometric Tests:
- Aptitude Tests: Assess job-related skills and abilities.
- Personality Tests: Predict likely behaviour and workplace fit.
- Assessment Centers:
1. Comprehensive Evaluation: Use multiple methods over several days.
2. High Cost: Resource-intensive compared to other methods.

Internal and external recruitment

Internal recruitment - takes places when a business looks to fill a vacancy from within the
existing workforce

- Advantages:
1. Existing knowledge of company culture and procedures.
2. Reduced training needs (especially induction).
3. Promotion opportunities for employees.

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 4. Lower costs (no external advertising).
5. Easier selection due to familiarity with candidates.
- Disadvantages
1. Limited pool of talent (potentially insufficient skills/experience).
2. Less likely for senior roles or rapidly growing companies.
- Internal recruitment is ideal for promoting from within, maintaining company culture, and
saving on costs when qualified candidates exist internally.

External Recruitment - occurs when a business invites applications to fill a vacancy from any
suitably qualified candidates

- Advantages:
1. Wider range of qualified candidates.
2. Fresh ideas and perspectives for the organisation.
3. Access to a global talent pool (through online methods).
- Disadvantages:
1. Higher costs (advertising, agencies)
2. Increased risk of hiring unsuitable candidates.
- External recruitment is better for attracting diverse talent with new ideas, filling senior
positions, or finding specialised skills not available internally.

Types of financial rewards

- Wages
1. Time-based
2. Rate is based on worker’s experience and responsibilities
3. Overtime rate for work in excess of contracted time
4. Workers are rewarded for time not effort
- Piece rate
1. Based on no. of items produced or sold in a given time
2. Motivated to work/sell more
3. Lack of financial security – pressure to sell
4. Workers might sacrifice quality for quantity
- Salary
1. Fixed annual rate paid on a monthly basis
2. Time-rate payment
3. Little incentive to work hard due to consistent pay
4. Difficult to reward better workers
5. Can be improved by using appraisals
- Commission
1. Output based system (based on how much they sell/produce)
2. Pays workers based on percentage of sales or output contributed rather than a
fixed amount per unit like piece rate
3. Similar advantages and disadvantages to piece rate
- Profit-related pay

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 1. Pay linked to profits of the firm
2. Strengthens employee loyalty
3. Limits labour conflict (both managers and employees benefit from higher profits)
4. May be too insignificant
- Performance related pay (PRP)
1. Based on individual performance/ability to meet goals
2. Various forms:
- Performance bonus
- Loyalty bonus
- Pay rise
- Gratuity – bonus for completing contract
3. Satisfies Equity Theory
4. Problems of bias or how to quantify performance
5. Targets may be too unrealistic
- Employee share ownership schemes
1. Giving shares for free or at a discount
2. Usually only given to senior management
3. Impractical for most companies
- Fringe benefits (perks)
1. Meets employee’s safety needs (Maslow) at a cost
2. Includes medical insurance, bonus schemes, company car, subsidised meals,
discounts

Types of Non-financial rewards

- Job enlargement
1. Horizontal expansion by increasing scope of work required
2. Enhances employee pride in work, feeling of responsibility
3. May lower productivity or quality because of higher workload
- Job enrichment
1. Provides employee with more complex and fulfilling tasks
2. Adds sense of control, pride, and achievement
- Job rotation
1. Shifting of cross trained workers to other tasks
2. Allows understanding of different operating areas of business
3. Can reduce fatigue, since new tasks are assigned
- Employee empowerment
1. Employees are delegated tasks assigned to managers
2. Increases employee motivation and productivity
3. Managers must share:
- Decision-making power
- Rewards (based on organisational performance)
- Knowledge/expertise needed to enhance performance
4. Employees must be highly skilled, motivated, and competent

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 5. Managers are ultimately still liable for whatever they delegate
- Teamworking
1. Staff work together on a task
2. Reduce boredom, build sense of belonging, greater flexibility
- Other forms of non-financial motivation
1. Recognition and praise
2. Working environment
3. Delegation
4. Worker participation

Training- is the process whereby an individual acquires job-related skills and knowledge

Development- refers to activities designed to increase employee’s skills, education, knowledge

and abilities in to workplace

- Overall Purpose:
1. Improve employee skills, knowledge, and performance.
2. Enhance employee motivation and loyalty.
3. Achieve organisational goals through a more effective workforce.
4. Reduce costs through increased efficiency and fewer errors.

Training vs. Development:

- Training: Focused on acquiring specific job-related skills and knowledge.

- Development: Broader term encompassing training and other activities that enhance
overall employee performance.
1. Examples: Courses, performance tracking, coaching, mentoring.

Benefits:

- Improved employee performance.

- Increased motivation and loyalty.
- Reduced costs through efficiency and quality improvements.

Types of Training

Induction Training:

- Provided to new employees.

- Introduces them to the company, policies, colleagues, and basic job duties.
- Benefits:
1. Faster employee productivity.
2. Reduced errors.
3. Improved employee retention.

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On-the-Job Training:

- Conducted within the workplace.

- Employees learn from experienced colleagues through observation and guidance.
- Methods:
1. Instruction manuals.
2. Shadowing experienced employees.
3. Job rotation.
- Benefits:
1. Practical skill development.
2. No need to leave the workplace.

Off-the-Job Training:

- Conducted outside the workplace (colleges, universities, training agencies).

- Provides a wider range of skills and knowledge not readily available internally.
- Methods:
1. External courses (lectures, seminars).
2. Self-study.
3. Open learning.
- Benefits:
1. Access to specialised skills.
- Disadvantages:
1. Higher cost (course fees, employee absence).

The impact of training

Drawbacks

- Training activities use up valuable resources that could be utilised elsewhere in the
organisation
- Attendance at training activities may mean that employees are unavailable to the
organisation for a period of time. Production may suffer as a consequence
- Employees, once trained. May have to leave for other possibly better paid jobs
- The beneficial effects of these activities may vary because some managers might seek
to avoid training their staff as it can lessen the degree of control they have over their
subordinates

Benefits

- Training can improve employee performance and hence the competitive position of the
business, by developing new skills and knowledge
- Training should improve employee morale and productivity
- Training is a core component of human resource management and assists organisations
in having the right workforce to achieve strategic objectives
- A reputation for training employees will assist businesses in attracting and retaining high
quality, creative and productive employees

2.6 Communication

Formal and informal methods of communication for an organisation in a given situation

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Communication- is the exchange of information between people and involves the transfer of
information

The process of communication: this cycle repeats

- The sender (initiates the communication)

- Message (the information that is transmitted)
- Medium (how the message is passed on eg. email)
- Receiver ( the audience at whom the message is targeted)
- Feedback ( was the message received and understood)

Formal communication

- Merits:
1. Official and structured, ensuring clarity and accuracy of information.
2. Used for confidential information or instructions.
3. Can be documented for future reference.
4. There is a flow of command
5. Follows the chain of command
- Demerits:
1. Slow, especially in hierarchical structures.
2. May stifle creativity and open discussion.
3. Can feel impersonal and rigid.
- Examples:
1. Official channels
2. Meetings, reports, emails, official announcements.

Informal communication
- Merits:
1. Fast and efficient for sharing ideas and updates.
2. Fosters a sense of belonging and community.
3. Encourages open and creative discussions.
4. Not bound by hierarchy
5. Improved relationships
- Demerits:
1. Can spread rumours and misinformation.
2. Lacks structure and documentation.
3. Not suitable for confidential information.
- Examples:
1. Unofficial channels
2. Conversations, lunch breaks, social gatherings, instant messaging.

Internal communication: exchange of information within an organisation, can be formal or

informal

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External communication: exchange of information with external individual and firm

Methods of communication

Organisations rely on various formal channels to ensure clear and structured communication.
These methods can be categorised as verbal, written, visual, and non-visual.

Verbal Communication

- Definition: Verbal communication, also known as oral communication, involves

transmitting information through spoken words. People directly interact by talking and
listening, facilitating quick exchanges.
- Benefits:
1. Speed: Messages are delivered and received instantly due to direct contact
between sender and receiver.
2. Clarity and Feedback: Allows for immediate clarification of doubts and questions,
promoting understanding.
- Examples:
1. Meetings: Formal gatherings with a pre-set agenda for discussing problems,
strategies, or announcements. Minutes are documented for future reference.
2. Interviews: Formal discussions used during staff recruitment and selection.
3. Appraisals: Performance reviews conducted through verbal communication.
4. Presentations: Formal talks delivered at staff meetings, sales pitches, product
launches, or press conferences.
5. Conversations: Formal discussions between colleagues, superiors, or
subordinates in a professional setting.
- Advantages of verbal communication
1. There is very little, if any, cost involved.
2. Detailed questions can be asked.
3. Questions can be answered without much delay, so feedback is quick and
spontaneous.
4. Interviews and presentations help to determine an employees ability to
communicate.
5. Facial reactions and body language, along with the tone of voice, can often be
judged.
- Disadvantages of verbal communication
1. For most methods of oral communication, there is not a permanent record of the
conversation for future reference.
The information given might not always be complete or truthful or it might be
misinterpreted.
2. Confidential messages can be difficult to communicate verbally, especially when
many people are involved.
3. Meetings and interviews can be very time consuming.

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Written Communication

Written communication is the use of written words to convey information. This method offers
several advantages over verbal communication:

- Permanent Record: Documents the message for future reference, providing a clear and
verifiable record of what was communicated.
- Accuracy: Allows for careful crafting of the message, reducing the risk of
misunderstandings due to unclear verbal delivery.
- Wider Reach: Written communication can be disseminated to a large audience
simultaneously, making it ideal for announcements or instructions.

Examples of Written Communication in Organisations:

- Letters: Used for formal communication with external parties like clients, suppliers, or
stakeholders.
- Memoranda (Memos): Internal documents used for concise communication within an
organisation, often for conveying instructions or updates.
- Reports: Detailed documents that present information, analyse data, or offer
recommendations. These can be used for various purposes, such as financial reports,
project reports, or research findings.
- Notices: Official announcements displayed on boards or distributed electronically to
inform employees about changes, policies, or events.
- Executive Summaries: Condensed versions of reports, highlighting key points and
conclusions for busy readers.
- Abstracts: Summaries of research papers or articles, providing a brief overview of the
content.
- Research Proposals: Formal documents outlining a proposed research project, its
objectives, methodology, and expected outcomes.

Visual Communication

Visual communication utilises visual elements to convey information or ideas. It leverages the
power of imagery to enhance understanding and message retention.

Advantages of Visual Communication:

- Enhanced Comprehension: Visuals are often easier to grasp compared to lengthy text,
promoting quicker understanding.
- Efficiency: Complex ideas or data can be communicated more concisely using visuals.

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 - Cost-Effectiveness: Visual aids can be cheaper to produce than extensive written
explanations.
- Catering to Learning Styles: Visual learners benefit from images and graphics to grasp
information more effectively.
- Lasting Impact: Powerful visuals can create a stronger impression and be remembered
longer, making them valuable in marketing (refer to Chapter 29 for details).

Types of Visual Communication:

- Bar Charts: Ideal for displaying frequencies and comparing data sets side-by-side.
- Pie Charts: Effectively represent percentage breakdowns, such as market share.
- Infographics: Combine textual information with graphics to present complex data in a
visually appealing format.
- Line Graphs: Track trends and changes over time, often used for sales figures or
historical data.
- Histograms: Illustrate the distribution of data, useful for showing trends over a period.
- Videos: Utilise moving images and sound to create a dynamic and engaging
communication experience.

Non-Verbal Communication

Non-verbal communication encompasses all forms of communication that don't involve spoken
words. This includes:

- Electronic Systems: Email, text messages, video conferencing (covered separately).

- Written Methods: Letters, reports, memos.
- Visual Stimuli: Body language, facial expressions, clothing, etc.

Examples of ICT-based Non-Verbal Communication:

Electronic Mail (e-mail):

- Advantages: Fast, efficient, allows sending data (text, images) to multiple recipients
simultaneously. Saves on costs compared to traditional mail.
- Disadvantages: Set-up costs (hardware, internet services), security concerns (data
breaches), system failures can disrupt communication.
Video Conferencing:
- Advantages: Enables communication between geographically dispersed individuals,
reduces travel time and costs, facilitates both verbal and non-verbal communication
(body language). Recordings can be made for future reference.
- Disadvantages: Expensive initial set-up, technical reliance can hinder meetings, virtual
setting lacks social aspects of face-to-face interactions.
Mobile Devices:
- Description: Widespread use of smartphones and tablets for communication, allows for
both verbal and non-verbal communication (text messages).

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 - Advantages: Convenient for on-the-go communication, improved camera technology and
Wi-Fi coverage enhance functionality
- Disadvantages: International calls on smartphones can be expensive, system failures
due to technical problems or power outages can disrupt communication.

Channels of communication

One way communication: takes place when information is passed within a single direction in
the organisation with no feedback taking place

- Problem: No feedback mechanism.

- Consequence: Subordinates' valuable insights are missed, potentially leading to poor
decisions.

Two-way communication: exists when information is passed up the organisational structure as

well as down the organisational structure, or outside the organisation and back in again.

- Problem (Information Overload): Managers receive too much information (e.g. emails).
- Consequence: Difficulty prioritising and responding to important messages, delaying
decision-making.

Vertical communication: is the exchange of information between individuals or groups who are
at different levels within the organisation, for example between managers and shop floor
employees.

- Problem: Information distortion or withholding.

- Cause: Tall hierarchies with narrow spans of control.
- Consequence: Poor decision-making due to incomplete or inaccurate information.

Horizontal communication: involves individuals or groups at the same level of hierarchy within
the business exchanging information, for example a meeting of a company's board of directors

- Problem: Conflicts with vertical communication or decisions.

- Cause: Informal discussions among peers bypassing official channels.
- Consequence: Confusion, delayed decisions, and reduced efficiency.

The selection of communication methods depends on various factors:

- Personal Preferences
- Organisational Structure: Tall hierarchies may require more formal and sophisticated
methods.
- Security Concerns: Sensitive information may require hard copies for protection against
data breaches.
- Proper training is necessary to utilise ICT effectively.
- Ease of Use
- Large firms might rely on email, while smaller ones may prefer verbal communication
- Storage Needs

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 - Time zones may influence the choice between email or phone calls.
- Urgency: Security and speed might favour courier services over regular mail.
- Cost: Written communication is generally cheaper than ICT-based methods.
Barriers to communication- are any factors that prevent information being passed
successfully between two or more people

Increased Communication Needs:

- Empowerment, decentralisation, and just-in-time practices require more communication.

- Diverse workforce (consultants, contractors, remote workers) adds complexity.
- Global operations create cultural, language, and time zone barriers.

Overreliance on Technology:

- IT systems require proper training and customization to be effective.

- Simply implementing technology can create more problems than it solves. If IT is
ineffective, requires employees to be trained

Management and Leadership Issues:

- Autocratic leadership styles discourage two-way communication.

- Physical separation of managers and employees hinders communication.

Mergers and takeover activity:

- Poor communication during pre-merger/takeover stages and integration can lead to

failure.
- Cultural and operational differences between merging companies can create
communication barriers.

Management Blind Spots:

- Managers may not recognize symptoms of poor communication (low morale, poor labour
relations).
- Senior managers may not be aware of communication gaps within the organisation.
- Jargon and technical terms can create confusion when communicating with non-
specialists.

Overcoming barriers to communication

Planning and Training:

- Identify communication gaps arising from changes like delegation.

- Train employees on communication skills and addressing potential issues.
- Train managers on selective technology use for effective communication.

Leadership Styles:

- Encourage two-way communication by avoiding autocratic leadership styles.

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Change Communication:

- Communicate frequently and transparently about changes and their implications.

- Encourage employees to ask questions and raise concerns.

Manager Training:

- Train managers on communication barriers and how to overcome them.

Language and Tone:

- Train employees to consider the audience and use clear, non-technical language.
- Monitor formal communications for appropriate language use (in larger companies).

Methods to improve communication

- Train employees in communication skills
- Avoid the danger of generating too much information
- Recognize that cultural and linguistic difference exist

UNIT 3 FINANCE AND ACCOUNTS

3.1 introduction to finance

Role of finance for business - businesses need capital for a variety of reasons:
- To start up or to expand the business
- To pay for its day to day expenses such as fuel and labour costs, rent (variable costs
and fixed costs)
- To provide a reward for the owners for taking the risk in starting the business
- To pay taxes to the government and other authorities
- A means to measure the performance of a business
- Indicates is a business is at risk of collapsing

Capital- is the money invested into a business and i sussed to purchase a range of assets
including machinery and stocks

As part of trading activities businesses have to spend their money, we can divide this
expenditure into capital expenditure and revenue expenditure.

Revenue expenditure- refers to the purchase of items such as fuel and raw materials that will
be used up within a short period of time
- The spending on assets that are used up in a relatively short period of time
- Purchase non-current assets/ fixed assets
- To pay day-to-day expenses
- For growth and expansion
- Example: fuel, components and raw materials

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 - Effect on profit:
1. Essential to production
2. If not controlled can have immediate and damaging effects on a business profit
Capital expenditure- is the spending by a business on non-current assets which will be used
for more than one year, such as premises, production equipment and vehicles
- Spending on non-current assets that will be used by the business for a long period of
time
- This type of spending has no immediate effect on profits. However capital expenditure is
essential is a firm is to generate long term profits

Statement of financial position/balance sheet- is a financial statement that records the

assets (possessions) and liabilities (debts) of a business on a particular day at the end of an
accounting period. Its is also known as a statement of financial position

Statement of profit or loss/profits and loss account- is a financial statement showing a

businesses sales revenue over a trading period and all the relevant costs incurring to generate
that revenue

Working capital formula = current assets - current liabilities

- Current assets is what the company owns

1. Cash in hand/bank
2. Stick of raw materials/ finished good
3. Debtors
- Current liabilities is what the company owes
1. Creditors
2. Bank overdraft
3. Short term loans
4. Long term debt
- Working capital- the ability to pay off day to day expenses
- Liquidity positions- ability to convert resources into cash
- Liquidity assets - convert assets to cash
- How fast the working capital cycle takes place determines how good the business’s
liquidity position

The working capital cycle

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Account payable- creditors (cash outflow)
Account receivable- debtors (cash inflow)

3.2 sources of finance

Sources can be split into 2 categories:

Internal source of finance- from within the business. This is a source of finance which exists
within a business, such as saving belonging to the owner of the business

External sources of finance- from outside the business. These are injections of funds into the
business by individuals, other businesses or financial institutions. A bank loan as an example.

Types Internal sources of finance:

Personal funds (for sole traders)

- Owners can use their personal savings or take loans secured by personal assets (e.g.
house) to invest in the business.
- Friends and family may also be persuaded to invest for partial ownership (through
shares in a private company
1. Advantages
- Increases chances of securing loans or other investments from external sources.
- Signals confidence in the business by the owner.
- Avoids interest payments
- Use of this source may help attract funds from others

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 2. Disadvantages
- Funds available are likely to be limited
- May result in personal assets being put at risk

Sale of assets

- Businesses can raise capital by selling assets they no longer need (e.g., land, buildings)
- Example: BP selling assets to become more environmentally friendly
- Sale and Leaseback:
1. Businesses sell assets and lease them back to gain immediate capital while
retaining asset use.
- Advantages
1. Avoids interest payments
2. Can prevent loss of control
- Disadvantages
1. Ongoing lease payments reduce long-term profits.
2. Asset no longer available to the business

Retained Profits
- Using Profits from Previous Years
1. Common financing method, especially for smaller businesses.
2. Avoids interest payments on loans and potential shareholder dilution from
issuing new shares.
3. They are a free source of finance as they do not incur interest charges
4. They don't involve any potential loss of control by a business’s owners
- Downsides of Retained Profit:
1. Opportunity costs: Forgone potential returns from other investments.
2. May not be enough to finance large purchases.
3. May disappoint shareholders seeking higher dividends.
4. The business may lose out on valuable alternative investment

Types of external sources of finance

When to Use External Sources:

- Large financing needs exceeding internal capacity.

- Low-risk financing options to attract external investors/lenders.
- Low retained profits limiting internal financing options.

1. Share capital- is finance raised by a company from selling shares in its business to
shareholders
- Advantages
1. It can be used to raise very large amounts of capital
2. The company is not committed to fixed interest payments
- Disadvantages

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 1. This source of finance is only available to companies
2. Private limited companies can only sell additional shares with
shareholders approval
3. Existing owners may lose control of the company

2. Loan capital- is money that is borrowed over a medium or long period of time.
Examples of capital include bank loans and mortgages
- Advantages
1. Can be negotiated to meet a s business’s precise requirements
2. Managers can plan for repayments within budget
- Disadvantages
1. Managers will have to offer property as collateral for mortgages
2. Businesses can pay large amounts of interest on very long term loans
- Types of loan capitals
1. Mortgages- a long term (up to 50 years) loans used to purchase land or
property. The land or property is used as security by the lender against
the failure to repay.
2. Debentures- are long term loans with fixed rates of interest. Land or
property is often used as security for this type of loan capital

3. Collateral- is the form of security required by banks and other financial organisations
before agreeing a loan. The security is normally assets which can be sold to recoup the
loan if it is not repaid to the bank or the financial organisation.

4. Overdraft- permits an individual or a business to borrow money up to an agreed limit at

a time.
- Advantages
1. A flexible way of funding day-to-day financial requirements
2. Interest is only payable on the actual amount borrowed
- Disadvantages
1. Interest rates are high
2. Bank may asf for repayment at any time
3. May not be available to some SMEs

5. Trade credit- is a period of between 30 and 90 days given by suppliers before payment
is due for good and services
- Advantages
1. A free source of finance as no interest is charged
2. Can help a business to reduce reliance on other more expensive sources
of finance
- Disadvantages
1. Only available for the short terms- up to 90 days normally
2. Availability depends on reputation, startup may not be able to use this.

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6. Crowdfunding- is a source of finance that entails collecting relatively small amounts of
money from a large number of supporters (the crowd)
- Advantages
1. Can avoid the need to deal with bureaucratic banks
2. Interest rates may be lower that for loans and mortgages
- Disadvantages
1. Unfamiliar source of finance for many managers
2. May not be suitable to raise very large amounts of capital

7. Leasing- involves paying for assets over a period of time without ever owning the asset
- Advantages
1. Allows businesses to update vehicles and equipment regularly
2. Avoids need for major capital expenditure
- Disadvantages
1. The business never owns the asset
2. May involve higher payments that purchasing assets

8. Microfinance providers- give financial services to poor and low income clients (kinda
loan sharks)
- Advantages
1. Possibly the only source of finance for low-income individuals and
businesses
2. Cost of borrowing likely to be lower than banks
- Disadvantages
1. Only relatively small sums of finance may be available
2. Microfinance providers may have limited resource

9. Business angles- is a person who has large personal fortune and is willing to use some
of this money to support risky ventures
- Advantages
1. Can bring expertise into the business as part of the deal
2. Avoids having to pay interest on the entire amount of finance
- Disadvantages
1. Some entrepreneurs and owners may not wish to have business angles
or venture capitalists involved in decision-making
2. Usually only able to raise relatively small amounts of finance

10. Venture capital- is funds (in the form of a mis of share and loan capital) that are
advanced to businesses which are thought to be relatively high risk
- Advantages and disadvantages same as business angles

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Appropriateness of short or long term sources of finance
Things to consider

Short terms sources of finance- are needed for a limited period of time, normally less than a
year
- Retained profit- internal source of finance
- Overdrafts and trade credit- external source of finance

Long term sources of finance- are those that are needed over a longer period of time, usually
over a year
- Retained profits
- Sale of assets
- Loan capital
- Crowdfunding
- Microfinance
- Business angels
- Share capital
- Leasing

Legal form of Possible source of finance Key issue for consideration

business

Sole trader Personal funds - Availability of collateral

Leasing - Loss of control by owner
Overdrafts - Evidence that business has
Microfinance providers potential to develop
Loan capital - Financial history of
Trade credit business/owner
Crowdfunding
Business angels
Venture capital

Partnership Partner’s personal funds - Availability of collateral

Leasing - Loss of control by partners
Overdrafts - Financial history and reputation
Microfinance providers of the business
Loan capital
Trade credit
Crowdfunding
Business angels
Venture capital

Privately held Dependant upon the size of - Disagreement amongst

company the private held company shareholders
Trade credit - Difficulty finding suitable

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 Leasing shareholders
Crowdfunding - Loss of control by existing
Overdrafts shareholders
Loan capital - Lack of collateral and security
Business angels for those lending funds
Venture capital - Element of risk in the loan
Private share issues

Publicly held Trade credit - State of economy and stock

company Loan capital market
Overdraft - Ability to move to an area
Leasing receiving govt. aid
Venture capital - Recent financial performance
Public share issue via the - Reputation of company and
stock exchange senior managers

Cost of Financing a Business

- Interest Rate: Significant cost, especially for large loans.

1. Higher risk or longer loan terms lead to higher interest rates.
- Selling Shares: Expensive due to administration, promotion, and potential insurance.
1. Public companies can use stock exchanges for cheaper share issues.
2. Rights issues (selling new shares to existing shareholders) are a cheaper option.
- Opportunity Cost:
1. Forgone potential returns from using retained profits for other investments.
2. Leaseback agreements require ongoing payments for the sold asset.
3. Trade credit may have higher prices due to essentially being an interest-free
loan.
4. Share capital may prevent access to expertise from new loan providers.

Maintaining Control

- Share Sales: Risk of losing control if new shares exceed original shares.
1. Companies can issue shares with limited voting rights to retain control.
- External Investors: May demand a say in management decisions.
1. Business angels may be an option for high-risk businesses but may also
influence management.

Matching Financing to Needs

- Property Purchase: Mortgages offer long-term loans at lower interest rates, making them
suitable for buying property.
- Risky Startups: Business angels specialise in high-risk ventures and may offer guidance
besides investment.
- Short-Term Needs: Overdrafts are ideal for short-term financing needs until sales and
revenue increase.

Debt Levels and Financing Choices

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 - High Existing Debt: Banks may be reluctant to lend more due to repayment risks,
especially with rising interest rates.
1. Businesses may have to sell assets (with or without leaseback) or issue shares
(if publicly traded).
2. Rule of thumb: Borrowing more than half the total capital raised may be risky for
banks.

Choosing Financing Options

- Internal Factors: Profitability (retained profits), reputation (supplier credit, loan rates),
and sellable assets.
- External Factors: Market growth (loan repayment capability) and interest rates (loan
cost).

3.3 cost and revenues

Type of cost

Costs- are expenses that a business has to pay to engage in its trading activities

- Business expenditures incurred during operations.

- Examples: raw materials, fuel, wages, salaries.

Importance of Cost Calculation:

- Helps managers make informed decisions on:

1. Starting a new business.
2. Expanding the business.
3. Accepting customer orders.
4. Reducing waste.
5. Implementing security measures.

Cost Categories:

- Fixed Costs: Remain constant regardless of production output.

1. Examples: rent, salaries, interest payments.
2. Don't change with increased/decreased production (e.g., factories using existing
facilities for longer hours during high demand).
- Variable Costs: Change directly with production level.
1. Examples: fuel, raw materials, components, labour.
2. Increase as production increases and vice versa (e.g., materials per computer).
- May have economies of scale (gradually flattening cost increase) with
larger orders (e.g., bulk purchase discounts).

Total Costs:

1. Sum of fixed and variable costs.

2. Used by managers to make decisions on:

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 - Production levels.
- Pricing strategies (spreading fixed costs over larger sales volume).

Formula: total cost = total fixed cost + total variable cost

Direct costs: can be related to the production of a particular product and vary directly with the
level of output

Indirect costs: are overheads that cannot be allocated to the production of a particular product
and relate to the business as a whole

Revenue- is the income a business receives from selling its goods or services

Formula: Revenue= quantity sold x selling price

Worked example
Calculating revenue
A food stall sold the following products in its most recent week of trading:
- 4500 packets of sandwiches at an average price of $2.50 per packet
- 9450 cups of coffee at $1.50 per cup
Some research showed that if it increased the prices of its sandwiches to an average price of $3
per packet, its sales would fall by 10 per cent. Increasing the price of its coffee to $1.75 a cup
would lead sales to 8000 cups per week

Question: how much revenue did the firm receive in its latest week of trading
Answer
- Sandwiches: 4500 x 2.50 = $11250
- Coffee: 9450 x 1.50 = $14175
- Total revenue for the week = 11250 + 14175 = $25,425

Question 2: What impact would making the changes suggested by the research have on the
food stalls revenue?
Answer
- Sandwiches: selling at $3 per packet would reduce sales by 10% to 4,050
- New revenue = 3 x 4,050 = $12,150
- Coffee: 1.75 x 8,000 = $14,000
- Total revenue= 12,150 + 14,000 = $26,150
- The changes would increase the food stalls revenue by 26150 - 25425 = $725
Total revenue: is the income a business earns from all of its activities added together
Revenue streams: are a business’s earnings from its full range of trading activities including
renting assets such as property

- Businesses can generate revenue from various activities besides their core product or
service offerings. These are called revenue streams
- Examples of Revenue Streams:

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 1. Dividends: Income from owning shares in other companies (e.g., holding
companies like Alphabet).
2. Advertising Revenue: Common for online businesses like Facebook (targeted
advertising).
3. Donations: Crucial for non-profits like Amnesty International (relies on donations
for 74% of revenue).
4. Bank Deposit Interest: Revenue earned on large cash holdings (e.g., Microsoft
earns $2.6 billion annually on $130 billion cash).
5. Subscription Fees: Growing revenue model for online content providers like
Netflix (replacing traditional sales models).
6. Merchandise: Selling secondary products related to the core business (e.g.,
movie theatres selling Harry Potter merchandise).
7. Sponsorship: Businesses sponsor events/teams for promotion (e.g., AIA
sponsoring Tottenham Hotspur for $50 million annually).

Profit: is the extent to which a business’s total revenue exceeds its total costs over a period of
trading

Loss: is the amount by which a business’s total costs exceed its total revenue over a period of
trading

Formula: profit or loss = total revenue - total costs

3.4 Final accounts

The purpose of accounts to different stakeholders

Final Accounts vs. Interim Accounts:

- Final accounts provide a complete picture of a business's financial performance for a
specific trading period.
- Interim accounts offer a snapshot of financial performance at a particular point during a
trading period.
IFRS and Global Financial Reporting:
- Publicly held companies often adhere to International Financial Reporting Standards
(IFRS).
- IFRS promotes consistency in financial reporting, making comparisons and analysis
easier.
Stakeholders and Final Accounts:
- Various stakeholders have an interest in a business's financial performance.
- Stakeholders can be categorised as internal (e.g., employees, management) and
external (e.g., investors, creditors).

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 - The statement of profit or loss (income statement) and statement of financial position
(balance sheet) are key components of final accounts.
Stakeholder Interest in Final Accounts:
- Internal stakeholders may be interested in assessing the company's financial health, job
security, and potential for bonuses.
- External stakeholders might be interested in making investment decisions, evaluating
creditworthiness, or assessing the company's overall financial stability.

Internal stakeholders

Share holders

- Ownership: Shareholders are the owners of the company.

- Financial Performance: Interested in sales revenue, operating profit, net profit, and
financial ratios.
- Profit Utilisation: Concerned with dividend payouts and reinvestment for future growth.
- Company Value: Examine the statement of financial position to assess the company's
value and retained profits.

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 - Future Growth: Seek indications of potential future growth based on financial
performance and retained profits.

Managers

- Performance Analysis: Use the statement of profit and loss to assess business
performance and make informed decisions.
- Detailed Information: Have access to more detailed financial information than published
annual reports.
- Cost Control: Monitor sales revenue and expenses to ensure profitability.
- Financial Stability: Evaluate the statement of financial position to assess the company's
financial health and future funding needs.

Employees

- Profit-Related Pay: Interested in profits after tax for pay and bonus calculations.
- Dividend Payouts: May be interested in dividend levels for comparison to their own pay.
- Job Security: Assess the company's profitability as an indicator of job security.
- Financial Stability: Evaluate the statement of financial position for the company's ability
to meet financial obligations

External stakeholders

External stakeholders are not part of the business, but have an interest in its performance and
thus in its final accounts.

Government
- Tax Revenue: Interested in the amount of tax the business owes.
- Economic Impact: Assess the business's impact on employment and local economy.
- Financial Scrutiny: Review final accounts for accuracy and compliance with tax
regulations.
- Managerial Decisions: Analyse the statement of financial position to understand potential
tax implications.

Suppliers
- Payment Ability: Evaluate the statement of financial position to assess the business's
ability to pay bills on time.
- Financial Health: Analyse the statement of profit and loss to assess the business's
financial stability and future pricing decisions.

Customers
- Pricing: Evaluate the statement of profit and loss to assess pricing fairness and potential
alternatives.
- Financial Security: Assess the statement of financial position to ensure the business's
long-term viability and reliability.

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Pressure Groups
- Social and Ethical Issues: Interested in the business's performance on sustainability and
ethical matters.
- Profit and Employee Welfare: May scrutinise profit margins and employee
compensation.

Investors
- Financial Performance: Analyse revenue trends and profits to assess investment
viability.
- Financial Security: Evaluate the statement of financial position to assess the business's
risk profile.

Final accounts

Final accounts are presented in the form of a number of financial statements, of which we shall
consider two:
- the statement of profit or loss (or profit and account), which records a business's profits
or its losses over a trading period
- the statement of financial position (or balance sheet), which sets out the assets owned
by the business and the debts (or liabilities) it owes to other organisations and
individuals.

Statement of profit and loss

- profit is what remains from revenue once costs have been deducted; if costs are greater
than revenues, the business has incurred a loss.
- Profit Calculation: Profit is the difference between revenue and costs.
- Types of Profit:
1. Gross profit = Sales revenue - Cost of goods sold
2. COGS = Opening stock + Purchases - Closing stock
3. Net profit = Gross profit - Expenses
- Expenses are the indirect or fixed costs of production
- such as administration charges,
- management salaries,
- insurance premiums (for buildings, vehicles and stock),
- rent of land/Property
- stationery costs.
4. Profit Before Interest and Tax = Revenue - cost of sales and expenses.
5. Profit Before Tax = Profit before interest and tax - interest
6. Profit for the Period = Total income - total costs - taxes - interest.

- Non-Profit Organisations: Surplus is the equivalent of profit for non-profit entities, any
excess of revenue over the total costs during trading period is referred to as surplus

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Example for statement of profit

Example for calculating profit period

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Example of calculating retained profit
- Retained profit refers to the profit retained by the company after paying dividends
- This depth of information is important to allow shareholders and other interested parties
to make an accurate assessment of the financial performance of the business.

Statements of Profit and Loss for Non-Profit Enterprises

Purpose: Non-profit businesses, like charities, aim to generate surpluses for social causes
rather than maximising profits for owners.

Format Differences:
- Terminology: Use "surplus" instead of "profit" and "deficit" instead of "loss."
- Dividends: Nonprofits don't have owners and don't pay dividends. All surplus funds are
retained.
- Taxation: Many countries exempt non-profits from paying taxes on their surpluses as
these are intended to be used for the benefit of the public .

Example statement of profit and loss account for non-profit organisation

Statement of financial position or balance sheet

- Purpose: Records a business's assets and liabilities at a specific point in time

(snapshot).
- Content: Shows how a business has raised and used capital.
- Importance: Provides valuable information for various stakeholders and business
decisions.
- Key Elements:
1. Assets: Possessions or resources owned by the business.
2. Liabilities: Debts or obligations owed by the business.
3. Equity: The residual interest in the assets of the business after deducting
liabilities.
- Uses:
1. Financial Analysis: Assess solvency, liquidity, profitability, and efficiency.

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 2. Investment Decisions: Evaluate the business's financial health and potential
returns.
3. Credit Decisions: Assess the business's ability to repay debts.
4. Internal Management: Make informed decisions about resource allocation and
financial planning.

Assets
Definition: an asset is simply something that a business owns.
- 2 main categories of assets that appear on the statement of financial position.

Non-current assets: These are assets owned by a business that it expects to retain for one year
or more. Such assets are used regularly by a business and are not bought for the purpose of
resale. Examples of non-current assets include:
1. Land
2. Property
3. production equipment/machinery
4. vehicles.

Current assets: This category of asset is likely to be converted into cash before the next
statement of financial position is drawn up. There are three major types of current asset:

1. Cash held within the business itself or in its bank accounts.

2. Stocks of raw materials and components as well as unsold finished goods.
3. Debtors (people and organisations that owe the business money).

Current assets are only retained by the business for a short period of time, usually less than one
year.

Trade Receivables: Amounts owed to the business by customers for goods or services sold on
credit.
Other Current Assets: Prepaid expenses, short-term investments, and other assets that are
expected to be realised within the current period.

Liabilities

Definition: Liabilities are debts owed by a business to others.

Categories:
- Current Liabilities: Due for payment within one year
1. Creditors
2. Bank overdrafts
3. short-term loans
- Non-Current Liabilities: Due for payment after one year
1. Mortgages
2. long-term bank loans
3. Debentures

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Formulas:
Net asset = Equity

Net assets = (Non Current assets + Current assets) - (Non Current liabilities + Current
liabilities)

Net assets = Total assets- Total liabilities

Equity:
- Shareholders' Funds: Capital invested by owners.
- Retained Earnings: Accumulated profits retained within the business.

Formula:
Total assets - Total liabilities = Net assets = Total equity
Total equity = share capital + retained profits (reserve)
Share capital = number of shares x share price per unit

Relationship Between Assets and Liabilities:

- Liabilities represent the sources of capital used to acquire assets
- Equity is the residual interest in assets after deducting liabilities

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Example of statement of financial position/ Balance sheet

Retained Profits
- Definition: Retained profits are profits accumulated over previous years that are not
distributed to shareholders.
- Investment: These profits are typically reinvested into the business to purchase assets
and generate future profits.
- Value Increase: As a business grows and acquires more assets, its overall value
increases, reflecting the retained profits.
- Liability: Retained profits are considered a liability on the balance sheet as they
represent the owners' stake in the business.
- Financial Health: A strong retained profits balance can indicate a good financial position
and potential for future growth.

Relationship Between Statement of Financial Position and Statement of Profit and Loss

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Interconnectedness: The statement of profit and loss and the statement of financial position are
closely linked, with figures from one influencing the other.
Key Relationships:
- Profit, Dividends, and Retained Profits: Profits not distributed as dividends are retained
and appear on the balance sheet as retained earnings.
- Short-Term Borrowing: Short-term loans appear as current liabilities on the balance
sheet, while interest payments on these loans are recorded as expenses on the income
statement, affecting profitability.
- Depreciation: Depreciation reduces the value of non-current assets on the balance sheet
and is recorded as an expense on the income statement.

Tangible and Intangible Assets

Classification: Assets can be classified as tangible or intangible.

- Tangible Assets:
1. Have physical existence.
2. Examples include land, property, machinery, and equipment.
- Intangible Assets:
1. Do not have physical form.
2. Recorded on the balance sheet if separately identifiable and acquired for a cost.
3. Examples include licences, patents, copyrights, and trademarks.
4. Valuation can be challenging.
5. May not be included on all balance sheets

Note: While intangible assets may not directly appear on the balance sheet, they still have
value and can significantly impact a business's performance and competitiveness.

Examples of Intangible Assets

1. Patents and Other Rights:

- Patents: Legal protection for inventions, valuable for pharmaceutical and technology
companies.
- Trademarks: Distinctive signs or symbols used to identify products or brands.
- Copyrights: Legal protection for creative works like books, paintings, and music.
2. Goodwill:
- Customer Base and Reputation: The value of a business's established customer base
and reputation.
- Takeovers: Often a significant factor in company acquisitions.
- Valuation: Can be substantial, but requires annual review and potential impairment
recognition.
3. Brands:

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 - Recognition and Differentiation: Names, designs, or other features that make a product
unique.
- Valuation: Can be included on the balance sheet if purchased or separately valued.
- Company Value: Can represent a significant portion of a company's overall worth

Limitations of Final Accounts

1. Time-Bound:
- Single Year's Analysis: Limited value without comparing multiple years to identify trends.
- Historical Perspective: Past performance may not accurately predict future results.
2. Focus on Financial Data:
- Human Resources: Ignores the impact of employee skills, motivation, and loyalty.
- Non-Financial Factors: Overlooks qualitative aspects like organisational culture and
community contributions.
3. Limited Comparability:
- Industry Benchmarks: Requires access to competitor's accounts for comparison.
- Time-Consuming: Obtaining and analysing competitor data can be time-consuming.
4. Selective Disclosure:
- Public Domain: Companies may limit information disclosure to avoid giving competitors
an advantage.
5. Historical Nature:
- Past Performance: Past financial performance may not be indicative of current or future
success.

Calculating Depreciation - 2 methods

Depreciation is the reduction in the value of a non-current asset over a period of time.

Why do businesses depreciate their non-current assets

Purpose:
- Accurate Valuation: Ensures that non-current assets are valued appropriately over their
useful lives.
- Cost Allocation: Spreads the cost of non-current assets over their useful lives for
accurate profitability assessment.

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Calculation:
- Depreciation Expense: Reduces the value of non-current assets on the balance sheet
and is recorded as an expense on the income statement.
- Non-Cash Expense: Depreciation does not involve an actual cash outflow.
Importance:
- Accurate Valuation: Provides a true and fair assessment of a business's worth.
- Profitability: Affects the level of profits and tax liability.
- Investment Attractiveness: Can impact the perception of a business's financial health
and investment appeal.
Effects of Depreciation:
- Overstated Depreciation: Understates asset values and profits.
- Understated Depreciation: Overstates asset values and profits.

Straight line methods - method 1

The annual depreciation is calculated using three key variables:

- The life expectancy of the noncurrent asset - how long it is intended to be used before it
needs to be replaced
- The scrap value (or residual value) of the noncurrent asset - how much it is expected to
be worth at the end of its useful life and
- The historic cost - the purchase cost of the noncurrent asset

Formula:

Annual depreciation = purchase cost / lifespan

Residual value of a non-current asset is the amount received when the asset is no longer
required and is sold or sent for scrap. (scrap value)

Annual depreciation = purchase cost (cost of asset) - residual value / lifespan

Example of depreciation straight line method

Straight Line Depreciation Method advantages and disadvantages

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Advantages:
- Simplicity: Easy to calculate and understand.
Disadvantages:
- Unrealistic Depreciation: Assumes a constant rate of depreciation, which may not reflect
the actual decline in value.
- Efficiency and Repair Costs: Does not account for changes in efficiency or increased
repair costs over time.

Unit of Production method - method 2

Formula:

Purchase cost−Residual value

Depreciation per unit=
units
expected number of
lifetime

Depreciation expense=depreciation per unit × Number of units produced

Basis: Depreciates non-current assets based on their usage or production volume rather than a
fixed time period.
Advantages:
- Realistic Depreciation: Reflects the actual decline in value based on usage.
- Accurate Running Costs: Provides better insights into the true costs associated with
non-current assets.
- Usage-Based Depreciation: Depreciates more in periods of high usage and less in
periods of low usage.
Disadvantages:
- Complexity: More complex to calculate than the straight-line method, requiring
adjustments based on usage rates.

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3.5 Profitability and liquidity ratio analysis

Financial Ratios and Ratio Analysis

1. Purpose:
- Evaluate a business's performance by analysing key financial statements.
- Compare financial data to make informed judgments.
2. Types of Ratios:
- Profitability Ratios: Assess profitability in relation to turnover, assets, or capital.
- Liquidity Ratios: Measure the ability to settle short-term debts.
- Financial Efficiency Ratios (HL): Measure resource utilisation effectiveness.
- Gearing (HL): Examine the relationship between internal and external financing.
3. Sources of Information:
- Financial Statements: Statements of financial position and profit and loss.
- Historical Performance: Trends in ratios over time.
- Industry Benchmarks: Compare ratios to industry norms.
- Economic Environment: Consider economic factors that may affect financial
performance.
4. Expression:
- Percentage: Express ratios as a percentage (e.g., ROCE).
- Ratio: Express ratios as a fraction (e.g., acid-test ratio).

Profitability Ratios
1. Purpose:
- Compare profits to key variables like sales or capital.
- Measure managerial effectiveness in generating profits.
- Influence share price and dividend payments.
- Facilitate industry comparisons.
2. Difference Between Profits and Profitability:
- Profits: Increased by reducing costs or increasing revenue.

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 - Profitability: Increased by increasing profits relative to another measure (e.g.,
sales or capital).
3. Importance:
- Managers strive to increase profitability ratios to demonstrate improved
performance.
- However, short-term profitability may not be sustainable if achieved through
unsustainable practices.

Gross profit margin

Formula:

gross profit
Gross profit margin= × 100
sales revenue

1. Purpose:
- Compares gross profit to revenue to assess the percentage of selling price that
contributes to gross profit.
2. Analysis:
- A higher gross profit margin indicates a greater portion of sales revenue
contributes to gross profit.
- Compare to industry benchmarks and historical performance for a more accurate
assessment.

Strategies to improve the gross profit margin

To enhance gross profit margin, businesses can implement a combination of revenue-
generating and cost-reducing strategies:

1. Increasing Sales Revenue

- Price Adjustments:
a) Price Increases: If demand is relatively inelastic (insensitive to price
changes), raising prices can increase revenue and gross profit margin.
However, this strategy must be carefully considered to avoid alienating
customers.
b) Price Reductions: For price-elastic products (sensitive to price changes),
offering discounts or promotions can stimulate demand and increase
sales volume, potentially leading to higher overall revenue.
- Market Expansion: Exploring new markets, both domestically and internationally,
can increase sales and revenue. However, businesses must carefully assess the
costs and risks associated with entering new markets.
- Product Mix Optimization: Analysing the profitability of different products or
services can help businesses focus on those with higher margins and potentially
discontinue or modify less profitable offerings.

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 -Value-Added Services: Offering additional services or features can increase the
perceived value of products and justify higher prices.
2. Reducing Cost of Sales
- Direct Material Costs:
a) Supplier Negotiations: Negotiating better prices or terms with suppliers
can significantly reduce material costs.
b) Material Optimization: Implementing strategies to reduce waste, minimise
material usage, or source cheaper alternatives can also lower costs.
- Direct Labour Costs:
a) Efficiency Improvements: Investing in technology, training, or process
improvements can increase labour productivity and reduce labour costs
per unit.
b) Outsourcing: Consider outsourcing non-core functions to reduce labour
costs and focus on core competencies.
- Supply Chain Optimization: Streamlining the supply chain can reduce costs
associated with transportation, warehousing, and inventory management.
3. Key Considerations:
- Customer Value: While cost reduction is important, it should not come at the
expense of product quality or customer satisfaction.
- Competitive Landscape: Analyse competitors' pricing strategies and cost
structures to identify opportunities for improvement.
- Long-Term Sustainability: Avoid short-term cost-cutting measures that may
compromise the business's long-term sustainability or competitive advantage.

Profit margin

Formula:

Net profit before tax∧interest

Net Profit margin= × 100
sales revenue

Purpose:
- Calculates the percentage of selling price that represents profit after deducting most
costs (excluding taxes and interest).
Significance:
- Provides a broader view of profitability compared to gross profit margin.
- Useful for businesses with high sales volumes and low profit margins.
Example:
- A supermarket with a low profit margin on each product can still achieve a satisfactory
overall profit due to high sales volume
- For example, if a company sells a product for $100, and its net profit after deducting all
costs (except taxes and interest) is $20, then its net profit margin is:
- (20 / 100) * 100% = 20%
- This means that for every $100 of revenue, the company earns $20 in profit.

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Strategies to improve the profit margin

Many of the strategies that we discussed for improving gross profit margin can also be applied
to enhance overall profit margin. These strategies include:
- Increasing Sales Revenue: Implementing effective marketing campaigns, expanding
into new markets, or introducing innovative products can boost sales and contribute to
higher profit margins.
- Reducing Cost of Sales: Optimising procurement processes, improving production
efficiency, or negotiating better terms with suppliers can help lower direct costs and
increase profit margins.

1. Reducing Expenses
- Beyond cost of sales, businesses can also focus on reducing other expenses to improve
profit margin:
a) Administrative Costs: Streamlining administrative processes, automating tasks,
or outsourcing non-core functions can help reduce overhead costs.
b) Marketing and Advertising Expenses: Evaluating the effectiveness of marketing
campaigns and optimising spending can ensure that marketing efforts are
aligned with business objectives and generate a positive return on investment.
c) Distribution Costs: Optimising distribution channels, negotiating better shipping
rates, or improving inventory management can reduce costs associated with
getting products to market.
2. Outsourcing
- Outsourcing non-core business functions can offer several benefits:
a) Cost Reduction: By leveraging the expertise and economies of scale of
specialised service providers, businesses can often reduce costs associated with
those functions.
b) Focus on Core Competencies: Outsourcing allows businesses to concentrate on
their core strengths and strategic priorities.
c) Flexibility: Outsourcing can provide flexibility and scalability, enabling businesses
to adjust their operations as needed.
3. Balancing Cost Reduction and Competitiveness
- While cost reduction can be a powerful tool for improving profit margin, it is essential to
strike a balance between cost-cutting measures and maintaining competitiveness.
Excessive cost-cutting can have negative consequences, such as:
a) Reduced Product Quality: Compromising quality to save costs can lead to
customer dissatisfaction and decreased sales.
b) Diminished Employee Morale: Cutting costs by reducing employee benefits or
wages can negatively impact employee morale and productivity.
c) Loss of Competitive Advantage: Overly aggressive cost-cutting may erode a
business's competitive advantage and make it difficult to compete in the market.

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The return on capital employed ratio (ROCE)

Formula:

Net profit before interest ∧tax

ROCE= × 100
Capital employed

Capital employed =non current assets+ equity

1. Purpose:
- Compares profit before interest and tax to capital employed to assess overall
financial performance.
2. Capital Employed: Sum of equity and non-current liabilities.
3. Significance:
- Primary efficiency ratio.
- Indicates the effectiveness of using capital to generate profits.
- Compare to industry benchmarks and historical performance for a
comprehensive assessment.
4. Benchmark:
- A typical ROCE range is 20-30%, but varies by industry and business.
5. ROCE in previous years and also with those achieved by competitors in the same
industry. Such comparisons allow better judgements of the performance of a business
by providing something to measure it against.

Strategies to improve ROCE

Many strategies that improve profit margin, such as increasing sales revenue or reducing costs,
can also contribute to higher ROCE.

1. Price Adjustments:
- Price Increases: If demand is inelastic, increasing prices can increase profits and
ROCE.
- Price Reductions: For price-elastic products, reducing prices can stimulate
demand and potentially increase profits.
2. Cost Reduction:
- Direct Costs: Reduce cost of sales by optimising production processes,
negotiating better supplier terms, or improving material usage.
- Indirect Costs: Streamline administrative processes, reduce marketing expenses,
or outsource non-core functions.
3. Capital Management:
- Optimise Capital Usage: Identify and sell excess capacity or assets to reduce
capital employed.
- Avoid Excessive Investment: Be cautious about investing in new assets if they do
not generate sufficient returns.

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Liquidity ratios

1. Purpose
- Liquidity ratios are essential financial metrics that measure a business's ability to
meet its short-term obligations.
- These ratios are particularly important for assessing a company's financial health
and its risk of insolvency.
2. Calculations
- Liquidity ratios typically compare a business's liquid assets, which are assets that
can be easily converted into cash, to its short-term liabilities.
- This comparison provides insights into the company's ability to pay its bills on
time and avoid financial difficulties.
Key Liquidity Ratios
1. Current Ratio: T
- This ratio compares a company's current assets (e.g., cash, accounts receivable,
inventory) to its current liabilities (e.g., accounts payable, short-term loans).
- A current ratio of 1.0 or higher indicates that the company has sufficient current
assets to cover its current liabilities.

2. Quick Ratio (Acid-Test Ratio):

- This ratio is a more stringent measure of liquidity, excluding inventory from
current assets.
- It provides a clearer picture of a company's ability to meet its short-term
obligations without relying on the sale of inventory.

Significance
Liquidity ratios are crucial for various stakeholders, including:
- Managers: To assess the company's financial health, identify potential liquidity risks, and
make informed decisions about financing and operations.
- Investors: To evaluate the company's investment risk and potential return.
- Creditors: To assess the company's creditworthiness and determine the likelihood of
repayment.
- Suppliers: To evaluate the company's ability to pay for goods and services on time.

The current ratio

Formula:
current assets
Current ratio=
current liabilities

- This ratio measures the ability of a business to meet its liabilities or debts over the next
year or so

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Current Ratio
- Definition: The current ratio measures a company's ability to pay off its short-term debts
using its current assets.
- Interpretation: A ratio of 2:1 indicates that for every $1 of current liabilities, the company
has $2 of current assets to cover it.
- Ideal Ratio: While a ratio of 2:1 was once considered ideal, current practices suggest a
more typical range of 1.5 to 2, due to the use of just in time systems of production.
- Factors Affecting Ideal Ratio: The industry, business model, and economic conditions
can influence the optimal current ratio.
- High Current Ratio: A high ratio might suggest inefficient use of assets, as excess cash,
not-investing in non-current assets to generate income, might not be generating returns.
1. Too high of a current ratio. This suggests that any combination of three
outcomes:
- There is too much cash in the business, which could be better spent to
generate more trade
- There are too many debtors, which increases the likelihood of bad debts
or customers defaulting on the money they owe
- There is too much stock, which increases storage and insurance costs.
- Low Current Ratio: A low ratio could indicate liquidity problems and difficulty meeting
short-term obligations.
1. A current ratio of less than 1.0 means the short-term debts of the business are
greater than its liquid assets, which could jeopardise its survival if creditors
demand payment.
Key points:
- A healthy current ratio is essential for a company's financial stability.
- The ideal ratio can vary depending on specific circumstances, however normally ideal =
2:1
- Both high and low ratios can signal potential issues

The acid test (or quick) ratio

Formula:

Current assets−stock
Acid test ratio=
current liabilities

Definition and Purpose

- Acid-Test Ratio (Quick Ratio): A measure of a company's ability to meet its short-term
obligations using its most liquid assets.
- Focus: Excludes inventory, which can take time to convert into cash.
Interpretation
- Higher Ratio: Indicates a stronger ability to pay off short-term debts quickly.

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 - Lower Ratio: Suggests potential liquidity issues.
Ideal Ratio
- Historical Standard: 1:1 was considered a balanced ratio.
- Current Trends: Many businesses operate successfully with ratios closer to 0.7:1.
- Industry-Specific: The ideal ratio varies based on the nature of the business.
Factors Affecting Ratio
- Inventory Turnover: Businesses with high inventory turnover can maintain lower acid-test
ratios.
- Credit Terms: Favourable credit terms from suppliers can allow for lower ratios.
- Cash Management: Efficient cash management practices can improve the ratio.
Implications of High or Low Ratios
- High Ratio: While indicating strong liquidity, it might suggest inefficient use of resources
if excessive cash is held.
- Low Ratio: A persistently low ratio could signal financial difficulties and potential default
risks.
Key Considerations
- Industry Benchmarks: Compare the ratio to industry averages for a more accurate
assessment.
- Trend Analysis: Monitor changes in the ratio over time to identify trends and potential
issues.
- Liquidity Management: Strive for a balance between liquidity and profitability.

Interpreting Liquidity Ratios

Understanding Liquidity Ratios

- Snapshot in Time: Liquidity ratios reflect a specific point in time, potentially limiting their
accuracy.
- Window Dressing: Companies might manipulate their financial statements to present a
more favourable liquidity position.
- Unexpected Changes: Unforeseen events can distort the representativeness of financial
data.

Case Study Analysis

1. Tiffany & Co.:

- Strong Liquidity: A current ratio of 4:1 and acid-test ratio of 1.46:1 indicate
excellent liquidity.
- Reason for High Ratios: Tiffany's large inventory of expensive jewellery
contributes to these strong ratios.
- Customer Satisfaction: The high inventory levels enable prompt fulfilment of
customer orders.
2. Apple:
- Robust Liquidity: Apple also demonstrates a strong liquidity position.

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 - Minimal Inventory: Its acid-test ratio is similar to the current ratio, suggesting low
inventory levels.
- Outsourcing: Apple's outsourcing strategy helps reduce inventory requirements.
3. Carrefour:
- Apparent Weakness: Carrefour's liquidity ratios might seem less favourable.
- Retail Industry Norm: Low liquidity ratios are common in retail due to cash-based
transactions and prompt customer payments.
- Confidence in Cash Flow: Carrefour's business model ensures a steady inflow of
cash

Key Takeaways
- Context is Crucial: When interpreting liquidity ratios, consider the specific industry,
business model, and economic conditions.
- Beyond the Numbers: Analyse the underlying factors driving the ratios, such as
inventory management, credit policies, and customer payment behaviour.
- Comparative Analysis: Benchmark liquidity ratios against industry peers and historical
trends for a more accurate assessment.
- Holistic Approach: Combine liquidity ratio analysis with other financial metrics to gain a
comprehensive understanding of a company's financial health.

Possible strategies to improve these ratios

- Current Ratio: Measures the ability to pay short-term debts using current assets.
- Acid-Test Ratio: Focuses on quick assets (excluding inventory) to assess immediate
liquidity.

Strategies to Enhance Liquidity

1. Selling Assets and Obtaining Long-Term Loans:
- Increased Cash: Selling non-current assets generates cash, boosting current
assets.
- Improved Ratios: This leads to higher current and acid-test ratios.
- Long-Term Loans: Similar effect while the loan is held as cash.

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 - Caution: Selling assets might impact long-term operations.
2. Delaying Capital Payments:
- Temporary Boost: Postponing payments can increase cash holdings.
- Limited Impact: Does not fundamentally improve liquidity.
- Timing: Effective when done close to the financial year-end.
3. Reducing Current Liabilities:
- Example: Paying off short-term debts can improve the current ratio.
- Trade-Off: Reduced cash availability might hinder future operations.
- Stakeholder Perception: A higher ratio might be perceived positively.
4. Negotiating Trade Credit Terms:
- Faster Collections: Shorter debtor payment terms increase cash inflow.
- Delayed Payments: Slower creditor payments provide more time to generate
cash.
- Improved Ratios: Both actions boost current assets and liquidity ratios.

Key Considerations:
- Balance: Strive for a balance between liquidity and profitability.
- Long-Term Implications: Consider the long-term consequences of asset sales and debt
deferrals.
- Industry Norms: Compare strategies to industry benchmarks and best practices.
- Cash Flow Forecasting: Use cash flow projections to assess the impact of liquidity-
enhancing actions.

3.6 Debt/Equity and other efficiency ratio analysis (HL)

Efficiency Ratios
- Purpose: Measure how effectively a business uses its assets to generate revenue and
profit.
- Focus areas: Inventory management, debt settlement, creditor control, and capital
structure.
- Importance: Assess the company's ability to manage assets and liabilities efficiently,
providing insight into operational efficiency.
Key Efficiency Ratios
- Inventory Turnover Ratio: Measures how quickly a company sells its inventory.
- Accounts Receivable Turnover Ratio: Measures how quickly a company collects
payments from customers.
- Accounts Payable Turnover Ratio: Measures how quickly a company pays its suppliers.
- Asset Turnover Ratio: Measures how efficiently a company uses its assets to generate
revenue.
Overall, these ratios help determine:
- How well a company is managing its resources.
- If there are areas where operations can be improved.
- If a company is using its assets effectively to generate profits.

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Stock turnover

Significance of Stock Turnover Ratio

- Efficient Inventory Management: A high stock turnover ratio indicates efficient
management of inventory, as the company is quickly converting its stock into sales.
- Reduced Inventory Costs: A high turnover reduces the costs associated with holding
inventory, such as storage, insurance, and obsolescence.
- Improved Cash Flow: By minimising inventory levels, businesses can improve their cash
flow by reducing the amount of capital tied up in stock.
- Profitability: A high turnover can contribute to increased profitability, as the company can
generate more sales revenue from its inventory.

Formula:

Cost of sales
Stock turnover ratio=
Average stock

- Cost of Sales: This is the total cost of goods sold during a period.
- Average Stock: This is the average value of inventory held during the period

Formula:

opening stock +Closing stock

Average stock=
2

- Interpretation: A high stock turnover ratio indicates that the company has sold its
average inventory five times during the period, suggesting efficient inventory
management. A low ratio may indicate slow-moving inventory or excessive stock levels.

Factors Affecting Stock Turnover

- Demand: Higher demand for a product can lead to higher stock turnover.
- Production Efficiency: Efficient production processes can reduce the time it takes to
produce goods, leading to higher turnover.
- Inventory Management Policies: Effective inventory management policies, such as just-
in-time (JIT) systems, can help to reduce stock levels and improve turnover.
- Pricing Strategy: Lower prices can stimulate demand and increase turnover, while higher
prices may lead to slower sales.
- Economic Conditions: Economic factors, such as recessions or inflation, can affect
demand for products and impact stock turnover.

Limitations of the Stock Turnover Ratio

- Industry-Specific: The ideal stock turnover ratio can vary significantly across different
industries.
- Seasonal Factors: Seasonal fluctuations in demand can affect stock turnover.

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 - Product Mix: A company with a diverse product mix may have varying turnover rates for
different products.
- Quality Issues: Low-quality products may lead to slower sales and lower turnover.
- Obsolescence: Outdated or obsolete products can reduce turnover and increase
inventory costs.

Use of ratio
- The standard figure for this ratio varies hugely according to the type of business.
- A market trader selling fruit and vegetables might expect to sell the business's entire
stocks every two or three days - more than 100 times a year. At the other extreme, a
shop selling antique furniture might only sell their stock every six months - or twice a
year.
- A low figure for stock turnover could be due to obsolete stocks.
- A high figure can indicate an efficient business, although selling out of stocks regularly
results in customer dissatisfaction.

Debtors days

- The debtor days ratio is a key financial metric that measures how long, on average, it
takes a business to collect payments from its customers. It helps assess the
effectiveness of a company's credit control processes and its liquidity.

Formula:

debtors ×365
Debtors Days=
total sales revenue

- Debtors: The total amount of money owed by customers.

- 365: The number of days in a year (used to annualize the calculation).
- Total Sales Revenue: Often used as an approximation of credit sales, which are the
sales for which payments are deferred for a certain period (e.g., 30 or 60 days).

Importance of the Ratio:

1. Liquidity Insight: A shorter debtor days ratio indicates faster collection of cash, which
boosts liquidity and helps in meeting operational expenses without delay.
2. Credit Control Efficiency: It reflects how well the company manages its credit terms with
customers. A longer debtor days figure may suggest inefficiencies in collection or overly
generous credit terms.
3. Marketing & Expansion Strategy: In some cases, businesses offer longer payment
periods (e.g., 30 or 60 days) to attract customers, especially in competitive markets or
during expansion phases.

Analysis:
- Shorter Debtor Days: Preferred for maintaining healthy cash flow.

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 - Longer Debtor Days: Could signal either an intentional marketing strategy (such as "buy
now, pay later") or issues in collecting payments, which could lead to cash flow
problems.

Practical Use:
- Monitoring this ratio over time helps businesses balance the need to offer competitive
credit terms with the goal of maintaining strong liquidity.

Creditors days

The creditor days ratio measures the average time it takes for a business to pay its suppliers
and creditors. This ratio is crucial for understanding how well a company manages its outgoing
payments and its overall cash flow management.

Formula:
Creditors× 365
Creditors Days=
cost of sales

- Creditors: The total amount of money the business owes to its suppliers.
- 365: The number of days in a year (used to annualize the calculation).
- Cost of Sales: An approximation of total credit purchases. Ideally, the calculation should
use credit purchases, but cost of sales is often used as a substitute when credit
purchases data isn't available.

Importance of the Ratio:

1. Liquidity Management: A longer creditor days ratio indicates the business takes more
time to pay its suppliers, which can help manage cash flow and liquidity.
2. Supplier Relationships: Extending the payment period may help with liquidity but could
strain relationships with suppliers, especially if the delay goes beyond agreed-upon
terms.
3. Financial Health: The ratio reflects how effectively a business manages its outgoing
payments and whether it is using credit as a financing tool.

Analysis:
- Longer Creditor Days: Indicates the business delays payments to suppliers, which can
help in maintaining liquidity but should be managed carefully to avoid damaging supplier
relationships.
- Shorter Creditor Days: Could mean that the business is paying suppliers promptly, which
is positive for supplier relations but could lead to cash flow pressures if not balanced with
incoming payments.

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Comparison with Debtor Days:

It's useful to compare creditor days with debtor days to assess the liquidity position:
- If Creditor Days > Debtor Days: The business is receiving payment from customers more
quickly than it is paying its suppliers, which is a favourable position for cash flow.
- If Creditor Days < Debtor Days: The business is paying suppliers faster than it collects
from customers, which could lead to liquidity issues, as there may not be enough cash
inflow to cover outgoing payments
- In essence, managing both debtor days and creditor days effectively helps maintain a
balanced cash flow and avoid liquidity risks.

Gearing ratio

The gearing ratio is a financial metric that assesses the proportion of a company's capital that is
funded by debt (long-term loans) relative to its total capital employed (long-term capital). It
measures financial risk and indicates how leveraged a company is. A higher gearing ratio
suggests that a business relies more on debt to finance its operations, while a lower ratio
indicates less reliance on borrowing.

Formula:
non−current liabilities
Gearing ratio= ×100
Capital employed

Formula:

Capital Employed=Total Assets−Current Liabilities

Capital Employed=Non−Current Liabilities+ Equity (Shareholders' Funds)

- Non-Current Liabilities: These are long-term borrowings or debts that the business must
repay after more than one year.
- Capital Employed: This includes both non-current liabilities and equity (shareholders'
funds). It represents the total capital the business has available to invest in its
operations.

Key Insights:
1. Measure of Risk: High gearing indicates a higher proportion of debt, which can make the
company more vulnerable to changes in interest rates and increase financial risk.
2. Long-Term Liquidity: Gearing is sometimes seen as a long-term liquidity ratio because it
reflects whether a company might struggle to repay its long-term debts, especially if
interest rates rise.
3. Capital Structure: It helps analyse how a company has structured its capital—whether it
has relied more on loans (debt) or equity (shares) for funding.

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Analysis of Gearing:
- Highly Geared (above 50%): The company has more than 50% of its capital as debt.
This makes it more vulnerable to interest rate fluctuations and increases financial risk,
potentially deterring shareholders due to lower dividends caused by interest payments.
- Low Geared (below 50%): The company has less than 50% of its capital as debt,
suggesting a more conservative approach to borrowing. This may appeal to
shareholders but could indicate that the business is not expanding as aggressively as it
could with more financing.

High vs. Low Gearing:

- High Gearing: While it increases risk, high gearing can be acceptable or even desirable
for businesses that are growing rapidly and generating strong profits, as they may
confidently service their debt. Businesses with stable cash flows or valuable brands may
also manage high gearing well.
- Low Gearing: A company with low gearing may be seen as financially safe but possibly
too cautious. Such businesses may not be maximising opportunities for growth through
borrowing.

How Companies Manage Gearing:

- Improve Gearing: Companies can lower their gearing by repaying long-term debt or
issuing more shares to raise equity.
- Acceptable Gearing: Firms with stable or predictable cash flows may opt for higher
gearing because they can reliably meet interest payments. Companies with strong brand
equity may also justify higher levels of borrowing by leveraging the value of their brands.

Practical Use:
- The gearing ratio is crucial when assessing a company's financial stability and growth
potential.
- It helps investors and managers understand whether the business is using debt
sustainably or taking on too much risk.
- However, context matters—high gearing can be risky for some businesses but
appropriate for others, especially those with robust profits or valuable assets.

Possible strategies to improve these ratios

To improve financial efficiency, a business can adopt various strategies tailored to key financial
ratios like stock turnover, debtor and creditor days, and gearing. Each strategy, however, must
be carefully balanced with the company’s operational needs and market conditions.

1. Stock Turnover Ratio

Strategies to Improve Stock Turnover:

- Reduce Stock Levels: By holding lower levels of inventory, such as reducing from
$3,250 million to $3,000 million as in the example of Punjab Paper Mills, the stock

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 turnover ratio improves, as calculated. However, this must be managed carefully to
avoid stockouts that could harm customer satisfaction.
- Just-in-Time (JIT) Inventory: Implementing JIT inventory systems allows a business to
minimise stock levels by ordering goods only when needed. This reduces the risk of
holding excess stock while improving turnover.
- Improved Forecasting: Accurate demand forecasting can help a business stock only
what it needs, improving turnover while avoiding the risk of shortages.
Risks: Over-reducing stock could lead to lost sales if the business cannot meet customer
demand on time.

2. Debtor Days Ratio

Strategies to Improve Debtor Days:

- Shorten Credit Terms: Reducing the credit period offered to customers from 60 to 30
days, for instance, can improve the debtor days ratio. This increases the speed of cash
inflow but may risk losing customers who prefer longer credit terms.
- Early Payment Discounts: Offering customers a discount for early payment can
incentivize quicker collections, improving cash flow while keeping customer relationships
intact.
- Stricter Credit Control: Implementing more stringent credit checks before offering credit
to customers can ensure that only reliable customers are given credit, reducing the risk
of late payments.
- Risks: Reducing credit periods or being too strict with credit terms may drive customers
to competitors offering more flexible payment terms, leading to lost sales.

3. Creditor Days Ratio

Strategies to Improve Creditor Days:

- Negotiate Longer Payment Terms: Businesses can negotiate extended payment terms
with suppliers to delay outflows without damaging relationships.
- Balance Debtor and Creditor Days: Managing both debtor and creditor days to ensure
that creditor days are higher than debtor days ensures that a business receives cash
from customers before it has to pay suppliers. This strategy helps maintain a healthy
cash flow without relying too heavily on external financing.
- Risks: Delaying payments without agreement can harm supplier relationships and may
result in penalties or loss of favourable terms in the future.

4. Gearing Ratio

Strategies to Improve Gearing:

- Repay Long-Term Debt: Reducing non-current liabilities (debt) by repaying loans helps
reduce the gearing ratio. Businesses can use surplus cash flows to pay off long-term
debt or restructure loans with lower interest rates.

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 - Issue More Shares: Raising additional equity by issuing shares increases capital
employed, thus reducing gearing. This can also reduce dependency on debt financing
and lessen the interest burden. The funds raised can be used to repay existing long-term
debts, further lowering gearing.
- Reinvest Profits: Rather than distributing all profits as dividends, a business can retain
earnings and reinvest them, increasing equity and reducing reliance on debt financing.
- Risks: Issuing more shares may dilute existing shareholders' equity and could lower
share prices if not managed well. Additionally, repaying debt may reduce the availability
of cash for other investments or expansion opportunities.

Insolvency vs Bankruptcy

Insolvency
- Definition: A state where a business cannot pay its debts and is unable to continue
trading.
- Judgement: A business is considered insolvent when its liabilities exceed its ability to
pay them.
- Legal Status: Typically illegal for an insolvent business to continue trading.
- Processes: Differentiates between companies and other types of businesses, varying by
country (e.g., UK, Australia).

Bankruptcy
- Definition: Legal status when an individual, sole trader, or partnership cannot pay its
debts as determined by a court.
- Unincorporated Business: Owners are not legally separate from the business; thus, they
do not have limited liability.
- Consequences: If unable to pay debts, the business is declared bankrupt, and its assets
(including personal possessions of owners) are sold to repay creditors.
- Outcome: Creditors may not receive the full amount owed due to insufficient assets.

Administration and Liquidation

- Incorporated Business: If deemed insolvent, the company's assets are sold to pay off
liabilities.
- Liquidation: The process of selling assets for cash; owners' private possessions are not
included.
- Administration: A company can enter administration to gain legal protection from
immediate liquidation. An administrator is appointed to protect shareholders' interests
and try to keep the business operating.
- Outcome of Administration: If the business cannot continue trading or settle debts, it will
face liquidation.

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3.7 Cash flow

Profit- can be defined in a number of ways but is essentially the surplus of revenue over costs
during a period of trading (Revenue exceeding total costs, positive surplus)

Cash- is a business's most liquid asset, ot is notes and coins as well as funds held in the
business bank account

Cash flow- is the movement of cash into and out of a business over a period of time.

Profitable Business with Cash Flow Issues:

- Credit Sales: Offering extended payment terms (e.g., 60/90 days) can lead to cash
shortages despite profitable sales.
○ Business pays suppliers upfront but waits to receive payment from customers.
- High Inventory: Businesses like jewellers with expensive inventory have significant cash
tied up in unsold products.
- Investment in Assets: Purchasing long-term assets (e.g., machinery) creates an initial
cash outflow but benefits future cash flow.

Consequences of cash shortage - Inability to pay bills, leading to potential insolvency and
business closure.

Long-Term Importance of Profit:

- Owners expect a return on their investment (shares) through profits

- Non-profit organisations need a surplus to sustain operations.

Balancing Profitability and Cash Flow:

- Managers cash carefully to ensure short-term survival even without immediate profits.

Cash-flow forecasts- are the movement of cash into a business, for example as a result of
selling its products

Net cash flow- is the balance between inflows and outflows of cash over a period of time-
usually one month

1. Importance of Cash Flow Management

- Businesses need sufficient cash to pay bills on time.
- Poor cash flow management can lead to business failure even with profitability.
2. Cash Flow Definition:
- Movement of cash into and out of a business over a period.
- Businesses are especially vulnerable during initial stages and expansion periods.

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 - Financial institutions may require evidence of cash flow management plans for
loans.
3. Cash Flow Forecasts:
- Predictions of a business's cash inflows and outflows.
- Typically created monthly and include:
1. Opening cash balance (amount of cash held at the beginning).
2. Cash inflows (receipts from sales, tax refunds, interest).
a) Credit sales are recorded when the income is received, not when
the sale is made.
3. Cash outflows (expenditures on goods, services, rent, wages, etc.).
4. Net monthly cash flow = inflows - outflows
a) Negative figure indicates a cash shortage.
5. Closing cash balance = opening balance + net cash flow
a) Becomes the opening balance for the following month.
4. Benefits of Cash Flow Forecasts:
- Helps businesses identify potential cash flow problems in advance.
- Allows businesses to plan for additional funding needs (loans, credit lines).
- Improves overall financial management and decision-making.

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Why do business forecast cash flow
- To support applications for loans
1. Cash flow planning given the more confidence that the entrepreneur or manager
will be able to make
- To help avoid unexpected cash flow rises
1. Cash-flow planning can help to ensure that businesses do not suffer from periods
when they are short of cash and unable to pay debts
2. Forecasting cash flows, a business can identify times at which it may not have
enough cash available
3. Allows to make necessary arrangements to overcome the problem
Interpreting Cash Flow Forecasts (AO2)

- Identify Potential Cash Shortages:

1. Look for negative closing balances indicating insufficient cash.
2. Allows managers to take corrective actions (e.g., secure loans, negotiate
payment terms).
- Limitations of Cash Flow Forecasts:
1. Uncertainty of Inflows:
- New ventures or markets may have unpredictable sales figures.
- Reliant on market research accuracy (primary vs. secondary data).
2. Difficulty of Long-Term Forecasting:
- External factors like economic changes or new regulations can impact
cash flow.
3. Volatile Outflow Costs:
- Businesses using resources with fluctuating prices (e.g., oil) face
challenges in forecasting outflows.

Amending Cash Flow Forecasts (AO4)

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 - Reasons for Amending Forecasts:
1. Inflows Lower Than Expected form the forecast:
- Lower sales or delayed customer payments.
2. Outflows Higher or Earlier Than Expected from the forecast:
- Unforeseen expenses or earlier than anticipated payments.

Relationship Between Investment, Profit, and Cash Flow

- Profit vs. Cash Flow:

1. These are distinct concepts.
2. A business can be profitable (positive surplus) but lack cash (negative cash flow).
3. A business can have cash but be unprofitable due to inefficient resource use.
- Investment
1. Purchase of non-current assets (property, machinery, other businesses) for
future earnings.
2. Examples:
- Amazon is investing in a wind farm for green electricity generation.
- AstraZeneca acquiring Alexion Pharmaceuticals.
- Impact of Investment on Cash Flow:
1. Short-term cash flow strain due to cash outflows for asset purchases.
- AstraZeneca's $39 billion acquisition of Alexion would cause a cash
outflow.
2. Businesses may borrow funds or use existing cash reserves to manage outflows.
3. Long-term potential for increased cash flow through:
- Reduced costs (e.g., cheaper electricity for Amazon).
- increased sales (e.g., attracting environmentally conscious customers for
Amazon).
- Investment and Profit:
1. Most investments aim to increase profits.
2. Amazon's wind farm investment could:
- Reduce operational costs (electricity) and raise profits.
- Attract environmentally conscious customers and boost sales/profits.
3. Investment risks:
- Uncertain return on investment (e.g., higher electricity costs or lack of
customer response).
- Delayed profit increase (e.g., wind farms not fully operational or slow
customer behaviour change).

Causes of cash-flow problems

- Businesses suffer from cash-flow problems, and a lack of cash flow is a major cause of
business failure
- Long Production Cycles: Businesses with lengthy production and sales cycles (e.g.,
housebuilders) face cash outflows before receiving cash inflows.
- Lack of Planning: Businesses without proper cash flow forecasts are vulnerable to
unforeseen problems.

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 - Overtrading: Rapid expansion without sufficient funding for labour, materials, etc., can
lead to cash shortages.
- Excessive Credit Allowance: Offering overly generous credit terms to customers (e.g.,
extended payment periods) delays cash inflows.
- Poor Credit Control: Inefficient management of customer payments (late payments,
bad debts) creates cash flow issues.
- Unexpected Events: Unforeseen cost increases or sales slumps disrupt cash flow
balance.
1. Example: The recent pandemic caused both decreased sales and increased
safety costs, impacting cash flow for many businesses.

Dealing with Cash-Flow Problems (AO2)

Strategies to Improve Cash Flow:

a) Reduce or Delay Cash Outflows:

- Reduce Costs (production, materials, staffing)
1. Beware of Side Effects: Lower quality products, negative publicity, customer loss.
2. Positive Example: Recycling reduces costs and may improve brand image.
- Improve Debtor and Creditor Management:
1. Negotiate extended credit terms from suppliers (delay cash outflows).
2. Shorten credit terms for customers (accelerate cash inflows).
3. Improve debt collection to reduce bad debts and late payments.
b) Increase or Speed Up Cash Inflows:
- Use Sources of Finance:
1. Debt Factoring: Sell outstanding debts to a factor for immediate cash (reduced
profits).
- Invoice Discounting: Similar to factoring, but business retains customer
management.
2. Short-Term Borrowing:
- Overdrafts: Flexible borrowing with interest.
- Short-Term Loans: Fixed amount with interest payments.
3. Sale and Leaseback: Sell an asset, lease it back for cash inflow (regular lease
payments).
4. Leasing: Rent assets instead of buying them, conserving cash.
5. Hire Purchase: Spread asset purchase cost over instalments, delaying cash
outflow.

Choosing a method of improving cash flow

Method Advantages Disadvantages

Improved - Can be a free method of - Reducing trade credit

management of movement offered ay result in a loss of
debtors and - Can be implement relativity customers
creditors quickly - May not be available to
- Available to most businesses new business or those
without reputation as

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 reliable payers

Reduction in - Can boost the businesses - May compromise quality of

costs profitability as well as products if its cheaper
strengthening its cash-flow resources are used
position - Businesses may have to
- May improve the business’s lower prices if quality is
image if it involves techniques reduced
such as recycling

Debt factoring - Can generate large and - Can reduce the amount of
immediate inflows of cash profit on each sale
- Available to businesses with - May not be viable for
little power to negotiate businesses making very
favourable trade credit small profits (such as start
ups)

Short-term - Can be available to the - Businesses with particularly

borrowing business immediately weak cash positions may
- May be highly flexible (as in be unable to negotiate
the case of overdraft) short term loans
- Can be relatively expensive
option as interest rates may
be high

Sale and - Avoids the need for any - Only a business with
leaseback interest payments saleable assets can
- Retains the use of the asst for engage in this method
the business and can raise - This may reduce the
large sums of finance businesses long term
profits by increasing
expenditure

Leasing - Avoids the need for large cash - The business is committed
outflows for assets that mya to regular, smaller cash
decline in value outflows
- Can allow businesses to use - The company does not own
the most up-to-date asset the assets that are used

Hire purchase - Can delay cash outflows by a - This is an expensive

considerable time period method of buying non-
- May be used to finance the current assets and may
purchase of relativity reduce profitability
expensive non-current assets, - The business doesn't own
having significant positive the assets until the final
impact on a business’s cash- payments is made
flow position

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UNIT 4 MARKETING

4.1 Introduction to marketing

Marketing- is the process of identifying, anticipating and satisfying the needs of customers in a
mutually beneficial exchange process

The Nature of Marketing (AO1)

1. Marketing Defined:
- Customer Focus: Businesses aim to understand and provide what customers
want (e.g., Amazon, Johnson & Johnson).
- Customer Needs: Marketing bridges the gap between customers and production
by:
a) Identifying customer needs.
b) Developing products/services to fulfil those needs.
c) Communicating product value and availability.
2. Importance of Marketing:
- Effective Marketing Outcomes:
a) Meets customer needs.
b) Offers affordable, valuable products.
c) Creates customer satisfaction (repeat purchases, positive word-of-
mouth).
- Marketing as an Ongoing Process:
a) Adapts to changing customer needs (e.g., health trends).
b) Responds to a shifting business environment (e.g., new laws,
technology).
c) Adjusts to competitor activity (e.g., new ride-sharing services).
d) Aligns with a business's evolving strengths.
- Benefits of Effective Marketing:
a) High customer satisfaction.
b) Customer loyalty and repeat business.
c) Increased willingness to try new products.
3. Key Features of Marketing:
- Two-Way Exchange: Customers receive goods/services, businesses receive
payment (usually).
- Mutual Benefit: Both parties gain (customer satisfaction, business profit).
- Customer Focus: Identifying and even anticipating customer needs (may go
beyond what customers know they want).
- Customer Delight: Aiming to exceed customer satisfaction and create loyalty.
4. Marketing Goals:
- Match business strengths with market needs.
- Develop and provide products/services that:
a) Satisfy customer needs (drive sales).
b) Generate profit for the business.
5. Marketing Activities:
- Market research (understanding customer needs).
- Product development.

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 - Packaging and promotion.
- Pricing strategy.
6. Marketing and Other Business Functions:
- Dynamic Process: Marketing works with other functions to influence:
a) Production decisions (what, how many, product range).
b) Pricing decisions (cost considerations, profit goals).
- Collaboration: Marketing interacts with other departments:
a) Operations (production capacity, cost considerations).
b) Finance (budgeting for product development, promotion).
c) Human Resources (staffing needs for marketing initiatives).
- Alignment and Coordination: All functions must work together for business
success.

Market orientation vs product orientations

Market Orientation (Customer-Focused): - a market-oriented business is one that bases its

decisions on customers needs

- Core Principle: Base decisions on customer needs.

- Activities:
1. Monitor customer needs and competitor offerings.
2. Adapt to market changes.
3. Conduct market research to identify demand.
- Benefits:
1. Increased chance of product-market fit.
2. Stronger competitive advantage.
3. Improved sales and profitability.
4. Likely to be essential in competitive market
5. Likely to invest in market research

Product Orientation (Production-Focused):- a product oriented business focuses more on

what it can produce and hopes that this will fit with customer requirements

- Core Principle: Focus on what the business can produce.

- Risks:
1. Products may not meet customer needs.
2. Limited market research can lead to low demand.
- Potential Success:
1. Limited competition or lack of customer choice.
2. Highly innovative products that create new needs.
3. Less likely to invest in market research but may invest in research and
development to innovate
- Long-Term Sustainability:
1. Vulnerable to competition offering better product-market fit.

Marketing objectives and corporate objectives

Marketing strategy- is a marketing plan to achieve the marketing objective

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 - Examples
1. Sales targets (volume or value)
2. Market share (percentage of total market sales)
3. Brand awareness (increasing customer recognition)

Marketing objective- is marketing target for the business, setting out what it wants to achieve
and when
- Marketing objectives support and contribute to corporate objectives.
1. Growth objective: Marketing might increase sales.
2. Profitability objective: Marketing might focus on high-profit products.

Corporate objective - is a target set for the business as a whole

- Examples
1. Growth (increasing sales or market share)
2. Profitability (increasing profits)

Market size- is the total number of items sold (this is measuring volume) or the total value of
sales

Market share- of a business measures its sales as a percentage of the total market sales
- Measures by the sales of business (or a particular product) relative to the total market
sales

Importance of Market Share and Market Leadership

Market Leader:

- The Business or product with the highest market share in a specific market is known as
the market leader.
- Examples (2021):
1. Chrome (internet browsers) - 60%+ market share
2. Apple (smartphones) - 20%+ market share

Benefits of High Market Share/Market Leadership:

- Competitive Advantage: Higher sales compared to rivals, potentially leading to higher

profits.
- Brand Recognition: Increased brand awareness and reputation, facilitating new product
launches.

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 - Economies of Scale: Cost advantages due to larger size (e.g., bulk discounts on
advertising or supplies).
- Barriers to Entry: Discourages new competitors due to the perception of a powerful
incumbent.

Challenges of Market Leadership:

- Maintaining Position: New competitors, changing customer preferences, and evolving

rival strategies can threaten market share.
1. Example: Toys R Us, once a dominant toy retailer, closed in 2018.

Market Share Interpretation:

- A change in market share means that a business’s sales account for a greater
proportion of the total sales in the market in the given period
- If market remains the same size/growing, then an increasing market share means higher
sales
- If the market is declining, the market share could be increasing even if sales are falling
- When considering market share, keep in mind the total market size

Market growth

Market growth- measures the rate at which the market size as a whole is growing over a given
time period

Example

- The growth rate is 2 percent this year, it means that the market is 2 percent bigger than
the year before

Market Growth Rates

- Positive Growth Rate: Market size is increasing.

- Negative Growth Rate: Market size is decreasing.
- Market Size Examples:
1. Stable: Pet food (assuming stable pet ownership).
2. Rapid Growth: Electric cars (increasing demand).
3. Decline: Sugary/salty foods (healthier trends).
- Business Preferences:
1. Fast-Growing Markets: Preferred by businesses due to increased sales potential
for all participants.
2. Static Markets: Sales growth for one firm comes at the expense of others,
leading to intense competition.
- Significance of market growth:
1. Growth Rate: Indicates the rate of sales increase in a market.

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 2. Business Preference: Faster growth generally creates more sales opportunities.
3. Market Size Consideration
- Large, slow-growing markets can still offer significant sales due to their
size (e.g., laptops).
- Small, high-growth markets might yield limited additional sales (e.g., local
market)

4.2 Market planning

Market planning- sets out the marketing objectives, strategy, budget and marketing activities
necessary to achieve the marketing objectives

Elements of a Marketing Plan

Purpose:

- Outlines marketing objectives, strategies, budget, and activities.

- Guides marketing efforts toward achieving specific goals.
- Based on market research data for informed decision-making.

Market Research provides information on

- Market size (volume/value)

- Likely market growth rate
- Market segments (size, growth)
- Competitive positioning according to customers
- Customer brand perception
- Information on the level of sales, through different distribution channels and trends in
distribution (e.g., online growth)

Market research limitations

Cost and Time: Conducting thorough market research can be expensive and time-consuming.
Involving large sample sizes, specialised techniques, or gathering data from a wide range of
sources can significantly increase the cost.

Data Accuracy: The quality of the research depends on the quality of the data collected.
Inaccurate or incomplete data can lead to misleading or useless results. This can happen due to
sampling errors (not getting a representative group),biased questions, or dishonest
respondents.

Limited Predictability: Market research can provide valuable insights, but it cannot predict the
future with [Link] preferences and market conditions can change rapidly, making
even the most recent research potentially outdated.

Focus on Existing Products: Market research is often better at evaluating existing products or
ideas than at identifying entirely new opportunities. It can be challenging to use traditional

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research methods to understand completely new concepts that consumers may not even be
aware of yet.

Ethical Concerns: There are ethical considerations when conducting market research, such as
ensuring informed consent from participants and protecting their privacy. Deception or
misleading practices can damage trust and taint the research findings.

Limited Scope: Market research may not capture all the relevant factors that influence
consumer behavior. Social,psychological, and emotional influences can be difficult to quantify
and measure through traditional methods.

Marketing Plan Components:

1. Executive Summary: Key points overview.

2. Market Analysis:
- Target market details.
- Competitor analysis.
3. Marketing Objectives: Specific goals (e.g., market share increase, regional sales boost,
seasonal sales consistency,distribution targets, brand awareness improvement).
4. Marketing Strategy: How objectives will be achieved (e.g., new product development,
targeting new segments).
5. Resource Requirements: Staffing needs.
6. Marketing Budget: Allocated marketing spending.
7. Marketing Activities:
- Specific actions with timelines.
- Assigned responsibilities.
- Budget allocation per activity.

The role of marketing planning

Marketing planning process

1. Marketing audit
2. Setting marketing objectives
3. Developing marketing strategies
4. Implementing strategies through the marketing mix

Marketing Plan should be detailed and specific

- Clearly defined various stages and elements of the plan

- Should list the resource requirements for each stage.
- Should have measurable targets with assigned responsibilities and timelines.
- Should also have timeline
- Should also be adaptable

Benefits of Marketing Planning:

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 - Clarity and Direction: Defines goals and guides marketing efforts.
- Resource Allocation: Ensures efficient use of marketing resources.
- Performance Measurement: Enables tracking of progress towards objectives.
- Alignment: Informs decisions of other business functions (e.g., operations, HR, finance).
1. Sales forecasts guide production targets (operations).
2. Sales growth plans influence HR recruitment (human resources).
3. Product launches impact cash flow needs (finance).

Elements of marketing mix

The marketing mix describes all the marketing activities involved in influencing a customers
decision to purchase a product

The 7Ps of the Marketing Mix:

1. Product: Features, specifications, and benefits of the offering.

2. Price: The customer's cost for acquiring the product.
3. Promotion: Communication activities like advertising to raise product awareness.
4. Place: Distribution channels used to get the product to the customer (e.g., direct sales,
retail stores).
5. People: Personnel involved in the sales process (e.g., shop assistants).
6. Process: The customer's buying experience (e.g., order forms, checkout procedures).
7. Physical Evidence: Tangible aspects affecting customer perception (e.g., store
environment, packaging).

Segmentation, targeting (target market) and postinion (positions maps)

Market segment- exists when there is a group of clearly identifiable customer needs and wants

- Segmentation- is the process of identifying these market segments

- Market Segment: A group of customers with similar needs and wants within a market
- Segmentation Process: Identifying these distinct customer groups.
- Benefits of Segmentation:
1. Targeted Marketing: Focus marketing efforts on specific segments with tailored
messaging and product offerings.
2. Increased Effectiveness: Meet customer needs more effectively, leading to:
- More precise marketing activities.
- Cost-efficiency
- Competitive advantage
- Higher sales
- Increased market share and profits.
- Segmentation Bases:
1. Geographic: Location, climate (e.g., cars for hot/cold regions, city vs. rural
needs).
2. Demographic: Age, gender, ethnicity, family size, etc. (e.g., toys for different age
groups, housing for singles [Link]).
3. Socio-economic: Income, profession, education (e.g., premium vs. basic product
lines).
4. Psychographic: Personality, lifestyle, values, attitudes (e.g., product promotion
and design based on customer personality).

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Targeting (target market) - A specific market segment chosen for focused marketing efforts.

Targeting Process: Selecting which market segments a business will choose to pursue based
on its attractiveness.

1. Target Market Criteria:

- Measurable: Segment size and characteristics can be identified and quantified.
- Accessible: Business has the resources to reach and serve the segment.
- Profitable: Segment offers potential for profitability.
2. Benefits of Effective Targeting:
- Tailored Marketing: Develop marketing activities aligned with specific segment
needs.
- Increased Sales and Brand Loyalty: Meeting customer needs more closely
fosters sales growth and loyalty.
- Marketing Efficiency: Deliver the "right product, at the right place, at the right
time, and at the right price."
3. Targeting Considerations:
- Segmentation vs. Standardisation: Balancing customer needs with
production/marketing cost efficiency.
- Trade-off: Highly segmented markets might require product variations and
marketing adjustments, leading to increased costs.
- Standardisation Benefits: Economies of scale and broader marketing reach with
a limited product range.

A position map- shows customers perceptions of the product of the business, relative to its
competitors

- Positioning: Customer perception of a product relative to competitors (e.g., McDonald's -

value, cleanliness; Apple - innovation, design).
- Product Positioning Map: Visual representation of customer perceptions on key
attributes (e.g., price vs. quality, formal vs. casual clothing).
- Benefits of Positioning Maps:
1. Competitive Analysis: Identify a product's position in the market compared to
rivals.
2. Market Gap Identification: Reveal potential opportunities for new product
targeting.
3. Marketing Strategy Adjustment: Inform marketing activities to improve sales and
market share.
- Positioning Map Axes:
1. Determined by customer-perceived key factors (e.g., clothing - price vs. formality;
cars - luxury vs. economy,sporty vs. family; breakfast - price vs. preparation
time).
- Using Positioning Maps:
1. Identify gaps in the market for new products (e.g., low-price formal wear).
2. Assess competition in existing market segments.
3. Base positioning on customer perception, not self-perception.
a) Customer perception drives purchase decisions, not self-perception of the
business.
- Limitations:
1. Customer perception requires market research to avoid skewed results.

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The difference between niche market and mass market

- Niche Market:
1. Targets a small, well-defined segment with specific needs and wants.
2. Example: Aston Martin (luxury sports car market).
3. Benefits:
○ Tailored offerings meeting specific customer needs.
○ Focused marketing approach (cost-effective).
○ High potential profit margins.
4. Challenges:
○ Limited customer base (sensitive to demand changes).
○ Vulnerable to competition from larger firms attracted by success.
- Mass Market:
- A market for goods that are produced in very large quantities. Because of economies of
scale, products sold in mass markets are less expensive than goods produced for niche
or highly specialised markets.
1. Targets the entire market with a standardised product/service.
2. Example: Generic brand of breakfast cereal.
3. Benefits:
○ Economies of scale (efficient production at high volumes).
○ Wider customer reach.
4. Challenges:
○ Generic products may not meet all customer needs as effectively as niche
offerings.
○ Requires significant marketing investment to reach a broad audience.
- Suitability:
1. Niche Market: Often suitable for small businesses due to lower resource
requirements and potential for high margins.
2. Mass Market: Generally more applicable for established businesses with the
resources for high-volume production and extensive marketing.
- Product Evolution:
1. Niche products may achieve mainstream success and transition into the mass
market.

Advantages Disadvantages

Niche market - Small market segment - Small market so

so marketing activities overall returns not that
can be very targeting high in absolute terms
- Small segment of
market so larger firms
may not be interested
- Can often charge high
price for a specialised,
target product which
helps cover cost of

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 provision

Mass market - Large scale - Products not adjusted

production enables for differences in
lower units costs; this customer needs;
enables lower price, specific groups may
making the product be targeted more
accessible for effectively
customers but at the
same time still
profitable for the
business
- Large target market
means the total sales
and profit in absolute
terms may be high
Importance of a Unique Selling Proposition (USP)

USP (Unique Selling Proposition/Point): A distinctive feature of a business, brand, or product

that differentiates it from competitors.

- Benefits of a Strong USP:

1. Differentiation: Stands out from competitors, attracting customer attention.
2. Premium Pricing: Potential to justify higher prices due to perceived value.
3. Brand Loyalty: Fosters brand recognition and customer loyalty.
4. Increased Sales and Profits: Drives sales and profit growth through customer
preference.

Product Differentiation Strategies (AO3)

Product Differentiation: Creating a perception that your product is distinct from competitors.

- Occurs when the benefit of your product are perceived as clearly different from those of
competitors products
1. Approaches to Differentiation:
- Product Features: Offer unique features, specifications, or functionalities. (e.g.,
easier to use, safer design)
- Distribution Channels: Implement unique distribution methods (e.g., direct online
sales vs. retail stores).
- Brand Values: Associate the brand with specific values (e.g., modern design,
eco-friendliness).\
- Pricing Strategy: Offer innovative pricing structures (e.g., instalments, trade-ins).
- Delivery Options: Provide unique delivery options (e.g., 24-hour delivery).
2. Benefits of Differentiation:
- Attract Customers: Stand out from competitors and capture customer attention.
- Premium Pricing: Potentially justify higher prices due to perceived value.
- Increased Sales and Profits: Drive sales growth through customer preference.
3. Considerations:
- Cost of Differentiation: Evaluate if additional costs are recovered by increased
prices.

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4.4 market research

Market research- is the process of gathering analysing and producing data relevant to the
marketing research

Why and How organisations Conduct Market Research (AO3)

- Market Research: Gathering and analysing data relevant to marketing activities.

- Purpose:
1. Understand the market by doing market analysis that includes the size and
growth of the market and market share
2. Understand the competitors in the market and the positioning of the market and
the market share
- Customers vs. Consumers:
1. Customer: Purchases and pays for a product/service.
2. Consumer: Ultimately uses the product/service.
- Market Research Applications:
1. Market Segmentation: Identify and target specific customer groups.
2. Needs vs. Wants: Understand fundamental needs and desired features.
3. Marketing Decision-Making: Inform product development, pricing, promotion, and
distribution strategies.
4. Improved Efficiency: Reduce marketing waste by aligning efforts with customer
preferences.
- Benefits:
1. Informed Decisions: Provides a clear picture of the market for better decision-
making.
2. Marketing Effectiveness: Enables targeted and efficient marketing activities.
3. Reduced Risk: Mitigates risks associated with product launches and marketing
campaigns.
- Stages of Market Research:
1. Define Research Objectives: Determine what information is needed.
2. Data Collection: Gather data through primary (surveys, interviews) or secondary
sources (industry reports,government data).
3. Data Analysis: Interpret and draw insights from the collected data.
4. Actionable Recommendations: Translate findings into actionable marketing
strategies.
- Timing of Market Research:
1. Pre-Launch: Assess market viability and inform business plan development.
2. Ongoing: Continuously monitor market trends and customer behaviour to adapt
marketing strategies.

Primary Market Research Methods

Primary Market Research: Collecting new data specific to a business's needs.

- Advantages: Tailored to specific research objectives.

- Disadvantages: Expensive and time-consuming compared to secondary research.

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 - Common Techniques:
1. Surveys:
a) Most common method.
b) Gather data from a sample of people.
c) Use open-ended ("What do you think of...?") and closed-ended ("Yes/no")
questions.
d) Collect quantitative (measurable) and qualitative (descriptive) data.
e) Strengths: Widely used, gathers various data types.
f) Weaknesses: Requires careful design, low response rates, potential for
bias.
2. Interviews:
a) In-depth questioning by an interviewer (respondent - person answering).
b) Conducted face-to-face, by phone, or online.
c) Allow for complex questions and follow-ups.
d) Strengths: Explore issues in detail, gather rich data.
e) Weaknesses: Expensive, interviewer bias possible.
3. Focus Groups:
a) Small group discussions guided by a moderator.
b) Enable detailed exploration of values and feelings.
c) Time-consuming and require incentives for participation.
d) Strengths: Gain insights into customer thought processes.
e) Weaknesses: Costly, may not be representative of the entire market.
4. Observations:
a) Market researchers observe and record consumer behaviour.
b) Examples: Watching customer behaviour in stores, analysing browsing
patterns.
c) Less reliant on what respondents say (potentially more objective).
d) Strengths: May reveal subconscious influences on behaviour.
e) Weaknesses: Relies on assumption that behaviour isn't altered by
observation.

Secondary Market Research Methods

- Secondary Market Research: Utilising existing data collected for other purposes.
- Advantages: Cheaper and faster method compared to primary research.
- Disadvantages: Data might not be perfectly aligned with specific research objectives.
- Common Sources:
1. Market Analysis Reports:
- Purchased from market research firms (e.g., Mintel, Euromonitor).
- Include market size trends, market share, competitor analysis, and key
issues.
2. Academic Journals:
- Peer-reviewed publications by academics and experts.
- Provide reliable and in-depth information on business, economics, and
social sciences.
- Examples: Journal of Management, Journal of the Academy of Marketing
Science.
3. Government Publications:
- Freely available data on economics, population, and trade.
- Examples: Census data, economic reports.
4. Media Articles (Print & Online):

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 - Offer insights but require evaluation for reliability and potential bias.
- Examples: BBC, Forbes, Financial Times, Wall Street Journal.
5. Online Resources:
- Vast amount of information including blogs, social media, and business
websites.
- Critical evaluation of information sources and potential bias is essential.

Qualitative vs. Quantitative Market Research

1. Qualitative Research:
- Focuses on opinions, motives, and beliefs.
- Uses small samples (focus groups, interviews).
- Aims to understand "why" behind customer behaviour.
- Provides insights into customer perception and initial ideas.
- Limitations: Small sample size, expensive, time-consuming.
2. Quantitative Research:
- Relies on large samples for statistical validity.
- Uses numerical data (surveys, questionnaires).
- Measures "what" in the market (trends, sales figures).
- Helps estimate future sales and market size.
1. Example: How many units sold? When are sales highest?
- Limitations: May not capture the "why" behind behaviour.
3. Choosing the Right Method:
- Qualitative research often precedes quantitative research.
- Qualitative research helps refine questions for quantitative studies.
- Together, they provide a comprehensive understanding of the market.

Sampling Methods

- Target Population: The entire group you're interested in gathering information about.
- Sample: A smaller group chosen to represent the target population.
- Sampling Techniques:
1. Random Sampling:
- Every member of the population has an equal chance of being selected.
- Requires a complete list of the population (may not be feasible).
- Advantage: Reduces bias.
- Disadvantage: May not always be representative due to random
selection.
2. Quota Sampling:
- Sets specific proportions for subgroups within the population (e.g., age,
gender).
- Easier and faster than random sampling.
- Disadvantage: Not random, may not be fully representative.
3. Convenience Sampling:
- Uses readily available people for surveys, interviews, or observations
(e.g., friends, family).
- Quick and easy, but highly susceptible to bias.
- Choosing a Sampling Method:
1. Consider factors like:
- Time constraints.
- Knowledge of the target population.

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 - Presence of distinct buyer groups.
2. Sample size: Larger samples provide more accurate results but increase cost
and time.
- Sample Size and Accuracy:
1. Larger samples lead to more representative findings.
2. Accuracy depends on data collection methods, sample size, and desired
precision.
3. Researchers express confidence levels based on statistical analysis.

4.5 the seven P’s of the marketing mix

Elements of the marketing mix

- Product: Features, specifications, benefits of the offering.

- Price: Cost to the customer.
- Promotion: Communication and advertising about the product.
- Place: Distribution channels (direct sales, retail stores).
- People: Sales staff and anyone involved in the customer experience.
- Process: Steps involved in purchasing the product (e.g., forms).
- Physical Evidence: Tangible aspects of the brand (packaging, website design).

All elements influence customer experience and purchase decisions.

PRODUCT

Products- of a business refer to what it offers to sell to its customers. These may be goods
which are tangible items, or services, which are intangible

Tangible attributes- of a product refer to its physical aspects, such as how it looks and feels

Intangible aspects- of a product refer to aspects that cannot be touched but can still be
important to customers such as the brand and its core values

Products (Goods & Services)

- Products: Tangible goods (cars) and intangible services (financial advice) offered by
businesses.
- Product Review and Development:
1. Continuously ensure products remain relevant and meet customer needs.
2. Consider the core benefit provided by the product (e.g., washing machine cleans
clothes).
3. Adapt products to address substitutes and new ways of fulfilling customer needs.
- Example: Phones replacing watches, video conferencing reducing travel
needs.
- Product Attributes:
1. Tangible: Physical aspects (specifications, features, design).
- Example: Washing machine size, features, capacity, energy usage.
- Consider usage variations across markets (apartment vs. house living).
2. Intangible: Non-physical but influential factors.
- Brand, core values, guarantees, after-sales service, technical support.
- Example: Customer loyalty based on trust in service or maintenance.

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 - Customer Purchase Decisions:
1. Both tangible and intangible attributes influence customer decisions.

The relationship between the product life cycle, product portfolio and the marketing mix

Product Life Cycle (PLC)

Stages:

1. Research & Development (R&D):

- Develop and test the product concept (prototypes, taste tests).
- High risk, high cost, no revenue generation.
- Length varies by product (pharmaceuticals vs. greeting cards).
2. Introduction (Launch):
- Product hits the market.
- High promotion costs, potential losses.
- Difficulty acquiring distributors and customers (new business, no track record).
- Customers are hesitant to switch due to potential costs (e.g., switching
penalties).
3. Growth:
- Increased sales, brand recognition, profitability.
- Easier distribution due to established sales records.
- Some products never reach this stage.
- Potential challenges:
a) Meeting demand.
b) Managing rapid growth (staffing, equipment, expansion).
c) Maintaining quality and deadlines.
4. Maturity & Saturation:
- Sales growth slows, competitors emerge.
- Examples: Washing machines, televisions.
- Long-lasting stage (years).
- Management decisions:
a) Invest to boost sales?
b) Develop a new model?
c) Target a new market?
d) Discontinue the product?
5. Decline:
- Falling sales, distribution difficulties, price cuts.
- Examples: Board games, road atlases, bow ties.
- Businesses may:
a) Reduce prices to maintain sales.
b) Discontinue the product.

Marketing Mix and PLC:

- Managers use the PLC to adjust marketing strategies based on the product's stage.
- Examples:
1. Launch (Promotion): Announce the product.
2. Maturity (Promotion): Emphasise differentiation from competitors.
3. Introduction (Price): High price for unique features.
4. Later Stages (Price): Reduce price to compete.

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 5. Introduction (Distribution): Difficult to secure.
6. Later Stages (Distribution): Easier to acquire distributors.

Examples of how marketing decisions may change at different stages of the product life cycle

Elements of the Introduction Growth stage Maturity stage Decline stage

marketing mix stage

Product May be limited May widen May stop May focus on

range initially range developing the best performing
range further models

Price May use a low If demand is Sales growth is May cut price to
price to growing may not slowing up and stimulate sales
introduce the need to lower so unlikely to
product price raise price; may
hold price

Promotion May focus on May build May promote May promote

making demand by any modification any special
customer aware persuading or updates to the offers or
of the new customers to product bargains to gain
product switch to the sales
product

Place May find it Demand growing May focus on May reduce

(distribution) difficult to get and may need to key distributions distribution to
outside to stock expand outlets essential and
a new product distribution most profitable
channels

Preventing product decline: Extension strategies

- Occur when marketing activities are changed to prevent sales from falling
- Key Idea: Firms can use various methods to extend a product's life cycle and delay
decline.
- Methods:
1. Increase Usage:
- Example: Shampoo instructions recommending double usage (wash,
rinse, repeat).
2. Encourage New Uses:
- Example: Head & Shoulders shampoo marketed for year-round dandruff
prevention (not just treatment).
3. Price Reductions:
- Lower prices to maintain sales in the maturity stage (if demand is price-
sensitive).
4. Product Adaptations:
- Introduce "new and improved" versions with added features or benefits
5. Promotional Offers:

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 - Run contests, discounts, or other incentives to boost sales.
6. Image Revamps:
- Re-package products to appear more modern and appealing to
consumers.

Product Life Cycle Model (PLC) Value and Limitations

- Value:
1. Highlights the need for adapting marketing strategies throughout a product's life.
- Limitations:
1. Varied Product Lifespans: The PLC shape can differ greatly between products.
- Examples:
a) New music releases (short life cycle - weeks).
b) Lego bricks (long life cycle).
2. Marketing Decisions: Not always clear-cut.
- Some declining products need removal.
- Others (e.g., Tango drink) can be rebranded and revived.
3. Retrospective Clarity: Stages may only be truly evident in hindsight.
- Dips may decline, decline may be dips.
4. Real-Time Decisions: Businesses must make choices without future knowledge.
5. Focus on Single Products: Ignores a company's entire product portfolio.
- Overall
1. The PLC is a helpful but imperfect model. It highlights trends but requires
adaptation for specific products and businesses.

The relationship between the product life cycle, investment, profit and cash flow

- Product Development:
1. Requires investment in idea testing, prototyping, etc.
2. May not lead to a successful product launch, resulting in lost investment.
- Launch Stage:
1. Further investment needed for promotion and market awareness.
2. Negative cash flow due to launch expenses and no sales.
- Growth Stage:
1. Potential for product failure due to unforeseen market issues or competition.
2. Strong growth can lead to increased sales, revenue, and cash inflow.
3. Profits and cash flow may improve, especially as promotional expenses
decrease.
- Maturity Stage:
1. Sales reach a peak, less investment needed for promotion.
2. Profits and cash flow likely to be maximised.
- Decline Stage:
1. Sales, profits, and cash flow tend to fall.
- Overall:
1. Investment is highest in early stages with potential for losses.
2. Profits and cash flow peak in the maturity stage before declining.
3. The PLC helps businesses anticipate financial implications at each stage.

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The potential effect of different stages of the product life cycle on investment, profit and cash
flow

Investment Profit Cash flow

Pre-introduction Research and loss Negative

development costs

Product development
costs

Introduction Launch costs Loss Negative

Growth Marketing costs Profits growing Positive

Maturity Lower Profit maximised Positive

Decline Little Profit falling Falling

Branding

1. Brand Definition (AMA):

- A combination of elements that identify a seller's goods or services.
- Differentiates them from competitors.
2. Elements of a Strong Brand:
- Clear values for positioning.
- Emotional connection with target audience.
- Motivates purchases and loyalty.
3. Aspects of Branding:
- Brand Awareness: Recognition and recall of a brand.
- Brand Development: Building brand identity, values, and communication.
- Brand Loyalty: Repeat purchases and preference over rivals.
4. Benefits of Brand Loyalty:
- Higher prices due to reduced price sensitivity.
- Repeat customers and reduce customer churn.
- Positive word-of-mouth recommendations.
- Increased success of new product launches under the same brand.
- Brand association with positive values (e.g., security, fashion, intelligence).
- Increased brand value.
5. Brand Loyalty and Customer Acquisition:
- Easier and cheaper to sell to existing loyal customers than to acquire new ones.
6. Brand Protection:
- Maintaining positive brand image (e.g., avoiding negative associations).
7. Brand in Promotions:
- Leverage brand values in promotions (e.g., Apple = design, technology).
- Build brand through promotional messages (e.g., personality, target audience).
- Reposition or protect brand image through targeted promotions.
8. Brand Value:
- Enhances profitability through higher prices and sales.

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 - Generates interest in new products under the same brand.
- Represents a financial asset (e.g., brand recognition and loyalty).

PRICE

Price and Purchasing Decisions

- Price as a Key Factor:

1. Plays a major role in customer buying decisions.
2. High prices can deter purchase even if desired.
3. Value for money perception influences price sensitivity.
- Price vs. Product Type and Brand:
1. Price Sensitive Products:
- Customers prioritise lower prices (e.g., gasoline).
- Brand loyalty is less influential.
2. Price Less Sensitive Products:
- Customers may be willing to pay more for:
a) Perceived value (e.g., wedding ring).
b) Brand reputation (e.g., clothing, shoes).

Factors Affecting Product Pricing

- Product Type:
1. Shopping Goods: Customers compare prices across multiple sellers (e.g.,
microwaves).
- Price sensitive - competitive pricing required.
2. Specialty Goods: Unique or high-performance products (e.g., luxury cars,
designer goods).
- Less price sensitive - focus on design and branding.
- Production Cost:
1. Price should generally cover cost per unit in the long term (except non-profits).
- Customer Income:
1. Prices may increase during economic booms and decrease during downturns.
- Demand:
1. Prices may rise during times of high demand (e.g., holiday seasons).
- Price Elasticity of Demand:
1. Measures how sensitive demand is to price changes.
2. Highly elastic = large price changes cause significant demand shifts.
- Competition:
1. Businesses consider competitor prices to stay competitive.
- May emphasise unique features to justify higher prices.
- Pricing Points:
1. Businesses may target specific price ranges (e.g., budget-friendly vs. premium).
2. May offer a range of products at different price points under various brands.
- Business Objectives:
1. Pricing may be influenced by profit targets or market share goals.
- Capacity:
1. Limited capacity (e.g., stadium) may allow for higher prices during peak demand.
- Product Life Cycle Stage:
1. Prices may be reduced in the maturity stage to maintain sales and compete.
- Marketing Mix:

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 1. Heavily branded products or exclusive distribution channels often command
higher prices.
2. Price typically reflects factors like:
- Unique selling proposition
- Perceived exclusivity
- High demand
- Exclusive sales outlets

Pricing methods

Businesses use various methods to set product prices. Here's a breakdown of some common
approaches:

1. Cost-Plus Pricing:
- Most common method.
- Price = Average Cost + Mark-up (desired profit).
- Ensures profit but may not consider market factors or competition.
2. Penetration Pricing:
- Low introductory price to gain market share.
- Useful for economies of scale (lowers cost with higher production).
- Effective if demand is price-sensitive (lower price leads to significantly higher
sales).
3. Price Skimming:
- High initial price for new products targeting eager early adopters.
- Price drops as the market matures to attract new customer segments.
- Suitable for protected ideas/inventions and less price-sensitive markets (limited
sales increase with price cuts).
4. Loss Leader:
- Selling a product below cost to attract customers to buy other profitable products.
- Used in promotions to increase overall customer spending.
5. Predatory Pricing:
- Aggressive tactic of setting extremely low prices to drive competitors out of the
market.
- Requires sufficient resources to survive a potential price war.
6. Premium Pricing:
- High price used to convey brand exclusivity and perceived higher quality.
- Relies on maintaining a premium brand image to justify the cost.
7. Competitive Pricing:
- Matching or undercutting competitor prices to stay competitive.
- More common with easily comparable products and increased online price
transparency.
8. Dynamic Pricing:
- Prices adjusted in real-time based on demand fluctuations.
- Examples: airlines, utilities, entertainment (tickets based on purchase time).
- Allows businesses to optimise capacity utilisation and revenue.
9. Contribution Pricing:
- Setting a price above variable cost to contribute towards covering fixed costs.
- Each sale with a sufficient contribution margin helps the business reach
profitability.
- Commonly used for established, high-demand products (e.g., fashion clothing).

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Price Elasticity of Demand (HL)

1. Understanding Price Sensitivity:

- Measures how demand changes in response to price fluctuations (all other
factors constant).
- Crucial for businesses to make informed pricing decisions.
2. Calculating Price Elasticity:
- Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in
Price)
- Negative sign indicates opposite movement of price and quantity demanded.
3. Elastic vs. Inelastic Demand:
- Elastic Demand:
1. Price elasticity > 1.
2. Larger percentage change in quantity demanded than price change.
3. Example: Customers readily switch brands of light bulbs due to price
differences.
- Inelastic Demand:
- Price elasticity < 1.
- Smaller percentage change in quantity demanded than price change.
- Example: Demand for addictive products like tobacco remains high despite price
increases.
4. Factors Affecting Price Elasticity:
- Availability of Substitutes:
1. Easier switching to alternatives leads to more elastic demand (e.g.,
energy-saving light bulbs).
2. Branding can make demand less price-sensitive (e.g., Coca-Cola).
- Time Horizon:
1. Short-term: Customers may be more loyal due to inertia or switching
costs.
2. Long-term: Customers become more price-sensitive as they explore
options.
- Product Type:
1. Convenience products (e.g. milk) have inelastic demand due to less price
consideration.
2. Shopping goods (e.g., clothes) have more elastic demand due to price
comparisons.
- Income Proportion Spent:
1. Small spending proportion leads to inelastic demand (e.g. milk).
2. Large spending proportion leads to more elastic demand (e.g., housing).
- Brand vs. Product Category:
1. Demand for a brand (e.g., specific gas station) is more elastic than the
product category (gasoline in general).

Price Elasticity, Revenue, and Profits:

- Elastic Demand and Price Cuts:

1. Can increase total revenue despite lower price per unit (more units sold).
2. Profitability depends on cost changes associated with higher production/sales.
- Inelastic Demand and Price Cuts:
1. Can decrease total revenue due to insufficient sales increase to offset lower
price.

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 - Inelastic Demand and Price Increases:
1. Can increase total revenue despite losing some customers (higher price per
unit).

PROMOTION

1. What is Promotion and its Objectives?

- Informing customers: About product existence, features, and why they should
buy it.
- Persuading customers: Highlighting product benefits compared to competitors.
- Reassuring customers: Confirming they made a good purchase decision.
- Promotion's objectives: Increase sales, market share, and product positioning vs.
competitors.
2. The Promotional Mix
- Combines various communication methods to promote a business and its
products.
- Choosing the right mix is crucial for effective communication and marketing
success.
3. Types of Promotion:
- Above-the-Line (ATL): Mass media communication for brand awareness.
1. Examples: TV, radio, billboard advertising.
2. Advantages: Broad reach, long-term brand building.
3. Disadvantages: Less targeted, difficult to measure immediate impact.
- Below-the-Line (BTL): Targeted activities with direct customer contact.
1. Examples: Sales promotions, sponsorships, loyalty schemes.
2. Advantages: Focused conversions, measurable return on investment.
3. Disadvantages: Limited reach.
- Through-the-Line (TTL): Combines ATL and BTL for brand awareness and
targeted sales.
1. Example: National TV campaign with local flyers and newspaper ads.
2. Advantages: Fights on multiple fronts, raises awareness and drives sales.
4. Choosing the Right Promotional Mix:
- Depends on several factors:
1. Product Nature: Consumer durables use ATL for awareness, BTL for
sales force to retailers. Industrial products rely on BTL sales force for
complex technical explanations.
2. Marketing Budget: Budget constraints limit options (e.g., small budget
may exclude TV advertising).
3. Available Options: Technological advancements (internet ads) and legal
considerations (restrictions on alcohol/tobacco promotion) influence
choices.
5. Benefits of an Improved Promotional Mix:
- Reduced costs through adopting cheaper communication methods.
- Increased sales through more effective communication reaching more people.
6. Social Media Marketing (A03)
- Uses social media platforms (Facebook, Instagram, etc.) to connect with target
audiences.

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 - Builds brand awareness, loyalty, sales, and profits.
- Involves creating content, posting on relevant platforms, engaging followers,
running ads, and analysing results.
- Requires a strategy: target audience, goals, platforms, content plan, engagement
methods, and success metrics (e.g.,followers, likes, clicks, conversions).
- Focuses on actions (clicks, sign-ups, purchases) to measure customer interest

PLACE

Distribution Channels (A03)

1. What are Distribution Channels?

- The path a product takes from producer to consumer.
- Involves intermediaries (wholesalers, retailers) or direct sales.
2. Types of Channels:
- Zero-Level: Producer to consumer (e.g., dentists, plumbers).
- One-Level: manufacturer to retailer to consumer (most common).
- Two-Level: manufacturer to wholesaler to retailer to consumer (broader market
reach).
3. Choosing a Channel:
- Product Type:
1. Convenience goods (milk): Wide distribution through many retailers.
2. Shopping goods (electronics): Distributed to specific stores for
comparison.
3. Specialty goods (luxury brands): Limited outlets that reinforce brand
image.
4. Industrial goods: Often sold directly to other businesses.
- Market Access:
1. Small target market: Direct distribution possible.
2. Mass market: Intermediaries needed for wider reach.
- Control:
1. Direct sales offer more control over marketing and pricing.
- Cost:
1. Direct sales can be cheaper (fewer middlemen).
2. Intermediaries add costs but handle logistics.
4. Digital Distribution:
- Growing trend: Online access and purchase of products.
- Benefits: Lower costs, global reach, 24/7 availability.
- Not suitable for all products (e.g., physical clothing).

PROCESSES

- The process refers to how you actually buy the product

- Importance:

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 1. Customer satisfaction is impacted by the buying process (e.g., mobile payments
for parking).
2. Positive experiences (easy online shopping) lead to brand loyalty and sales.
3. Negative experiences (website crashes, long queues) can damage brand image.
- Improving Processes:
1. Make them efficient and customer-friendly.
2. Enhance customer perception of the business.
- Examples:
1. Mobile payments for parking.
2. Online shopping with phones/tablets.
3. User-friendly websites for bookings.

PHYSICAL EVIDENCE

- Physical Evidence in Service Marketing

1. Refers to tangible aspects of a service experience.
2. Refers to tangible aspects of the process involved in the buying process
3. Influences customer perception of a business.
- Examples:
1. Physical Premises:
a) Car showroom: Design, cleanliness, car displays, staff presentation.
b) Hair salon: Signage, layout, music, overall atmosphere.
2. Company Website:
a) Design and user experience.
b) Brand image and message conveyed.
c) Overall impression on potential customers.

Integrated Marketing Mix

- The marketing mix combines all activities influencing consumer decisions and
experiences.
- Elements must work together seamlessly to reinforce brand values.
- The mix should be adapted to the specific context:
1. Product Life Cycle: Pricing adjustments in decline stage (e.g., lowering prices).
2. BCG Matrix: Investment in distribution for star products (e.g., wider reach).
3. Product Type: Competitive pricing for shopping goods, premium pricing for
specialty goods.
4. Marketing Objectives: Increased sales may require more promotion.
5. Target Market: Tailored promotion (e.g., social media for youth, traditional media
for older demographics).
6. Competition: Differentiation strategy may require product development
investment.
- Example: IKEA's Integrated Marketing Mix
1. Positioning: Well-designed furniture at low prices.
- Product: Affordable design, flat-pack storage, self-assembly.
- Place: Low-cost locations, warehouse-style stores.
- Process: Self-service product selection, transportation, and assembly.
- Promotion: Focus on practicality and affordability.
- People: Low staffing levels for cost control.

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 - Consumer vs. Industrial Products
1. Consumer Products: Purchased by individuals for personal consumption.
a) Promotion: May involve national advertising to reach large audiences.
b) Marketing Focus: Considers both rational and emotional decision-making.
2. Industrial Products: Purchased by businesses for their operations.
a) Promotion: Focuses on technical performance and value proposition.
b) Marketing Focus: Targets professional buyers seeking value for money.
- Consumer Product Subcategories
1. Convenience Items (Milk, Newspapers): Wide distribution is crucial.
2. Shopping Goods (Washing Machines, Microwaves): Emphasise features and
benefits for comparison
3. Specialty Goods (Sports Cars, Rolex Watches): Brand image and exclusive
environment are key.

UNIT 5 OPERATIONS MANAGEMENT

5.5 break-even analysis

- Defined as the difference between sales revenue and variable costs of production.
- Formula: Contribution = Revenue - Variable Costs
- Used to cover fixed costs and generate profit.
- Contribution per unit: Revenue per unit - Variable cost per unit.

Break-Even Analysis

- Determines the output level where total revenue equals total costs (no profit, no loss).
- Uses contribution to assess profitability at different output levels.

Break-Even Point Calculation

- Formula 1: Break-Even Quantity = Fixed Costs / (Selling Price - Variable Cost)

- Formula 2 (using contribution): Break-Even Quantity = Fixed Costs / Contribution per
Unit

Break-Even Charts

- Visually represent total revenue and total costs at every output level.
- Profit is made when revenue exceeds cost.
- Break-even point is where the revenue and cost lines intersect.

Profitability Analysis with Break-Even Charts

- Higher output = Higher revenue (if sales don't fall significantly).

- Margin of Safety: Difference between current sales and break-even output (indicates risk
tolerance).
- Target Profit Output: Output level required to achieve a desired profit.

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 - Impact of Price Changes:
1. Increase: Higher revenue, lower break-even quantity (but may affect demand)
2. Decrease: Lower revenue, higher break-even quantity (may increase sales).
- Impact of Cost Changes:
1. Fixed Cost Increase: Shifts total cost line upwards, increasing break-even
quantity.
2. Variable Cost Increase/Decrease: Changes contribution per unit, affecting break-
even quantity.

Uses of Break-Even Analysis

- Simple and quick technique for decision-making.

- Supports loan applications by forecasting financials.
- Analyses effects of price and cost changes on profitability.
- Useful for small businesses and new ventures.

Limitations of Break-Even Analysis

- Assumes all products are sold (may not reflect reality).

- Oversimplifies pricing structures (averages may not be accurate).
- Assumes constant variable costs (may not be true in reality).
- Relies on accurate data for reliable forecasts.
- Limited as a standalone decision-making tool.

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