BUSINESS STUDIES

Unit1 the purpose of business activity

The economic problem: needs and wants
Need: is a good or service essential for living
Want: A good or a service that people would like to have but is not
essential for living.
Need and wants are unlimited.
What permits us have all we need and want? Our resources. Without
them we wont be able to have them. These resources yes are
limited or scare. So between the unlimited need and wants and the
limited resources we have a problem, because we can't satisfied our
self. This is the basic economic problem = it results from there
being unlimited wants but limited resources to produce the goods and
services to satisfy those wants. This creates scarcity. SCARCITY:
The lack of sufficient products to fulfill the total wants of the
population.
This resources are called in business, the factors of production
which are those resources needed to produce goods or services. They
are in limited supply and there are 4 factors of production:
Land: Term used to cover all of the natural resources provided
by nature and includes fields and forests, oil, gas, metals and
other mineral resources. In addition, the term is including the
raw materials.
Labour: Physical or mental work needed to make the product.
Capital: The finance, machinery and equipment needed for the
manufacture of goods.
Enterprise: This is the skill and risk-taking ability of the person
who brings the other resources together to produce a good or
service. E.G: The owner of a business. These people are called:
entrepreneurs; they can be one or many and so, this is include
the person or group of people that risk their capital in a
business venture and combine the other three resources.
Difference between land and capital:
The capital you use it more than once while the land you use it
only one time.
The real cause of the shortage of goods and services in a country is
not having too little money but in the world as a whole, these factors
of production are limited in supply. As there is never enough land,
labour, capital or enterprise to produce all of the needs and unlimited
wants of a whole population there is an economic problem of
scarcity.

Limited wants + unlimited resources = scarcity = The basic

economic problem.

In all of these factors of production we have to take decisions since

not all of our wants can be met. When you take decisions, there are
many things you have to leave in order to do something else. And we
are constantly evaluating to know if what we are doing is better than
what we have done before. This is useful to be able to take it into
account in a future.
When we take decision, we have to take in account the opportunity
cost which is the next best alternative foregone in order to do
something else. THE OPRTUNITY COST IS ONLY ONE.
Example: David Hairstyles.
o Enterprise: David
o Labour: Hairdresser Assistant that washes hair
receptionist manicure etc.
o Land: Nail burnish Shampoo water.
o Capital: Scissors hairdryer.
Opportunity cost:
o I have money. I have more than one alternative.
Buy a simple car
Travel to Paris
1st payment in a new house.
o I chose travelling to Paris. Your opportunity cost is buying
a car because is your next best opportunity. (IS ONLY
ONES OPPORTUNITY COST)
SPECIALIZATION AND THE DIVISION OF LABOUR:
When we chose a resource to use it in a particular way, that choice
involves a lost opportunity. It is therefore important to use these
resources in the most efficient ways possible.

Specialization: As the factor of production is limited we tried

to make good use of it, for it we need specialization which
means division of labour.
Division of labour: Is when the production process is split up
into different tasks and each worker performs one of these
tasks. It is also known as SEPCIALIZATION.
The division of labour has advantages and disadvantages:
Advantages

Disadvantages

Workers are trained in one task and

specialize in this. This increases
efficiency and output. (As you
concentrate on what each worker is
best you increase the total
productivity and output.)
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Workers can become bored doing just

one job efficiency might fall.

Less time is wasted moving from one

If one worker is absent and no one
workbench to another (is avoiding
else can do the job, production might
time wasting from moving people from
be stopped.
one stage of production to another)
Specialization between firms by using
timber firms to provide him with
materials, and transport and retail
firms to sell and distribute the goods
to the costumers. A chain of
production has now been created
using several firms to supply the
product from its natural state to the
final consumer.

The firm is now relying on outside

suppliers and retailers and these could
prove to be unreliable.

TOTAL OUTPUT AND PRODUCTIVITY

(output over worker) are increased.
BUSINESS ACTIVITY
Why is business activity needed?
o People have unlimited wants
o The 4 factors of production the resources needed to
make goods are in limited supply
o Scarcity results from limited resources and unlimited
wants.
o Choice is necessary when resources are scare. This lead
to opportunity cost.
o Specialization improves the efficiency with which
resources are used.
What's the aim of business?
o The aim of all business is to combine the factors of
production to make products which will satisfy people
wants. These products can either be goods (physical
items; which we can though and see) or they can be
services (such as insurance, tourism or banking).
What would life be without business activity?
o People would be self-sufficient, which means that they
would produce for their own, to attempt themselves.
Business activity is in order to:
o Combine scares factors of production in order to produce
goods and services.
o Produce those goods and services to satisfy needs and
wants of the population.
o Employs people as workers and pays them wages to allow
them to consume those products made by other people.

BUSINESS OBJECTIVES: To establish an objective is to establish a

goal.
The main objectives that the business establishes are:
To make profits (The difference between the price and all the
costs.)
o The owner of a business will aim for a satisfactory level of
profits which will save them having to work too many
hours or paying too much in tax to the government.
Nevertheless there are dangers to this aim, suppose a
firm put up its prices in order to make more profit,
consumers buying its products. Other example may be
people encouraged to set up in competition, which will
reduce profits in the long term for the original business.
To provide a service: In some countries, these important
businesses are owned by the government. The main aim of
these businesses is to provide an essential service to the public
such as water or electricity supply rather than making as much
profit as possible.
To add value: Added value may be defined as the difference
between the selling price of a product or service and the cost of
bought in materials and components. Value is added to
materials and components by working on them and turning
them into much more expensive finished articles. What is the
point of increasing added value? It means that the value of the
firms output rises, it sells goods in a more expensive market
and it has the chance to earn higher profits (as long that it
increases prices by more than costs). In addition, the add value
helps to make things desirable so people would want them.
o How can business increase added value?
Increasing the willing in consumers to pay higher
prices. For this, they make them think that the
products are of a higher quality. For example, in
jewelry, one option may be present items in an
attractive way, create a luxury feel to the shop and
offer a grift-wrapping service.
Any change that adds more to price than to costs of
material will add value. A manufactured could add
new characteristics to a product. For example,
offering zoom lens with the camera.
To survive = survival
When a firm has recently been set up, or when the economy is
moving into recession, a bss could be more concerned with
survival than anything else. New competitors can also make a
firm feel less secure. The managers of a bss threatened in this
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way could decide to lower prices in order to survive, even

though this will lower the profit on each item sold.
To grow or expand
The owners and managers of a bss may aim for growth in the
size of the bss for a number of reasons:
o To make jobs more secure if the business is larger
o To increase salaries and status of managers
o To open up new possibilities and help to spread the risk of
the business by moving into new products and markets.
o To obtain a higher market share from growth in sales.
o To obtain cost advantages, called economic of scale.

DIFFERENCE between profit and add value: Profit is inside the

value added.
Price
$100
Materials
$15
----------Value added $ 85 this valued added are machines, salaries,
insurance, taxes, also profit.
We have businesses that are PROFIT MAKING and we have
others that are NON-PROFIT MAKING.
Profit making: Main objective: To make profit. In this business part
of the profit goes to the owners and the other to the business.
Nonprofit making: Main objective: To provide services. These
businesses are also worry about making profits because without these
profits they cannot sustain their services.
STAKEHOLDERS
Groups which are involved in business activity. They do have an
interest and they have to do with business in one way or the other.
With the stakeholders we refer more to the profit-making business.
Who are the stakeholders?
o Workers or employees: they are employed in the
business. They have to follow instructions from the
managers, or even from the owners. They have contracts
with the owner, a legal document that establishes the
conditions of their work, and the salaries. They may have
part-time or full-time contracts. The risk they take is to
be exposed to not get a job or to be asked to leave the
business.
o Directors or manager (they are also workers but they
are the ones that administrate the business): they control
the work done by others workers. They take very
important decisions that may lead the business in a crisis
or in good conditions. These might include where to
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locate the bss, the price, and what to produce.

Owners: The ones who put money to the business to set
it up. They are risk-takers because at the moment they
invest their money they are not sure that the business
will run okey. If the business is successful, the owners will
take a share of the profit.
Consumers: they are the costumers who but the product
or service that a bss makes. Business needed to find what
products consumers are prepared to, this is call market
research. Consumers are attracting to the product by
forms of promotion, such as advertising.
Government: The government decides on laws that will
affect bss activities. They want bss to be successful in its
country since they have the responsibility of employing
workers and so, successful bss will mean: more workers
employed. In the other hand, they are also interest about
successful business because of the taxes. With this
money, the government provides for the benefit of the
population.
The community as a hole: (For example: if tarbut
close, victoria's house suffers. All other groups as
neighbors, restaurants are affected too. For example in a
cloth factory, the community as a hole would be
neighbors, the suppliers). The competition is also part of
this group. Land and resources are used up during
business activity, to make used of them you will need
from the community. Also, sometimes business produce
some products that may be dangerous for the
populations, such as cigarettes, so then, the community,
also gets involve at this point. In contrast, some product
are very beneficial to the community, as for example,
medicines or buses for public transport. In the other
hand, some factories can produce pollution, which affects
all the community.
In addition, business activity provide work to many
people, such as workers and managers who obtain
incomes from it, and is this what increase the
community's standard of living. Therefore, the whole
community can be affected either in positive aspects as in
negative ones.

Each group has different main objectives:

Workers: earn the highest possible salary.
Owners: make the highest profit possible.
o The main objective from the workers and the owners is
not possible at the same time; this is known as a
conflict of objectives.
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Consumers: Lowest price possible.

o Here there is another conflict of objectives in which the
owners are again involved. You cant offer the lowest
price possible at the same time you want to have the
highest possible profit.
Directors: They worry about making a profit in the long time.
(Different to the owners who want the profit the sooner so they
can invert or also be sure they have it)

CONFLICT OF OBJECTIVES:
Business tries to satisfy the objectives of more than one group,
when they can't satisfy two groups at the same time, this
problem is known as: conflict of objective.
UNIT 2
The levels of business activity 3 main stages:
Primary stage of production: The primary sector industry
extracts and uses the natural resources of the earth.
Secondary stage of production: The secondary sector of
industry manufactures goods using the raw materials provided
by the primary sector.
Tertiary stage of production: The tertiary sector of industry
provides services to customers and the other sectors of
industry. E.G: Transport, bakery.
De-industrialization: Occurs where there is a decline in the
importance of the secondary, manufacturing sector of industry in a
country.
Public and private sectors of industry: 3 different types of
economic system which are used by countries to manage their
resources as efficiently as possible.
Free market economy:
There is no government control over land, capital and labour;
all resources are owned privately. As a consequence, are the
private owners the ones in charge of taking any decision, what
they produce and the prices they sold their goods.
Nevertheless, as there is not any intervention from the
government or any state organization, the prices are forced by
the market; the variation between the supply and the demand
together with the competition will be what regulates the
business.
In the other hand, owners will have making profits as their
main objective and they will respond to the people demand. As
a consequence, they produce what they want because of the
absence of the state and so, the free choice is created, this is
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the choice that costumers have at the moment of buying a

product.
o Advantages:
Consumers are free to choose what they want to
buy
Workers are encouraged to work hard since they
can keep most or all of their incomes because of
low or non-existent taxes. This increase the
efficiency.
Bss compete with each others and this could keep
prices low.
New bss are encourages to set up in order to make
profits. They will invest more on the bss in order to
improve its efficiency.
o Disadvantages:
There are no- government provided goods and
services, such as health and education available to
everybody. Only those who can afford to buy these
important services will benefit from them.
There is no government planning or control over the
economy so there could be many uncontrolled
booms o recessions in the economy, for example, a
crisis.
Business might be encourages to create monopolies
(bss which controls all of the market for a product)
in order to increase profits. Consumers would have
limited choice finishing by that way with the
freedom of choice.

Command or plane economy:

Is the contrary to the free market economy, here the
government or the state plans and controls the use of
resources. There might be no private property at all, private
sector doesnt exist. The government decides what is to be
produced and in what quantities. Consumers have little choice
and workers could be told where to work and what work to
perform.
Different to the free market economy the main aim is not
making profit, if not, is probably offering a service to the
population.
o Advantages:
Government control should eliminate any waste
resulting from competition between firms.
There should be work for everybody.
The needs of the population are met but there is
little production of luxury goods for the wealthy.
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o Disadvantages:
There is less incentive to work as the government
fixes wages and private property is not allowed.
The government may not produce goods which
people want to buy. There is not freedom of choice.
The lack of a profit motive for firms leads to low
efficiency.

Mixed economy:
This type of economy mixes some features of both, the
command economy and the free market one. Because of this
you can difference two sectors, the private and the public one.
Nearly every country in the world has a mixed economy with a:
o Private sector (like the free market economy): It is made
up of bss not owned by the government. Most of them
will have the aim of making profits. The owner is the one
who decides what and how to produce and also the price
charged for it. Nevertheless, the private sector might be
affect by the influence of the government control, for
example, the dictation of laws that affect the business or
the taxes.
o Public sector (command economy): Made up of
government or state- owned and controlled bss and
organizations. Some goods or services are provided free
of charge to the consumers. The many for it comes from
the taxpayers. Different to the private sector, here the
aim is not always to make profit but most likely is to
provide a service to the community.

Privatization: The process in which the government sold off the

business that previously owned to owners of the private sector.
Advantages: As it is a private business, usually the objective of
the owner is to make profit and this will increase efficiency. The
money to invest is not more from the population and this mean
that the investor would invest all the capital (money invested
into a business by the owners) needed to the business to be
profitable, and these bring as a consequence a better business
with better conditions.
Also, decisions are not going to be taken by governments with
politics in mind. Different to that, they will be taken by decision
that permit improve the business.
In the other hand, privatization permits more competition (if it
is sold off to different owners) and this increase also the
efficiency and it's what helps to the business to keep the prices
low.
Moreover, is important the fact that privatization would rise
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money form the government at the moment that the business

are sold.
Disadvantages: As the new owners are interested mainly in
profits, non-profitable businesses will close. That bss may be
important services such as electricity. Moreover, people will
have to pay in order to obtain the service and so, only people
with money will be able to benefit themselves from the
services. In addition, the owners objectives will lead into a
change on the mode of production and this will probably include
the fired of many workers.
In the other hand, if the government sells the bss to one owner,
this will still be able to run it as a monopoly which could lead to
higher prices for the costumers together with a limited choice.
As well, only a few people (the new owners) will benefit from
owning the business, whereas before privatization the whole
country could benefit from any profit made as it was owned by
the government.

Size of the business:

What gives as an idea of the size of the business? The number of
employees might be a method to measure the size of a business, the
one more employees has, the one larger is. But with it there is a
problem, by saying the numbers of employees you are not counting
the capital used, machines produce more than workers, and this is
not count, this mean a problem in those capital intensive firms. As
this is, the capital employed is another method of measure but with it
there is also a problem because what about the mental human work?
is not count in this stage, and here the problem is with the companies
that used labour - intensive methods. Also, it is important to take in
account the output and the sales. On contrary, the profit is not a fuck
to evaluate because it measures more efficiency and is much more
related with the manager skills.
As a consequence, there is not only way of measuring it, if not, the
way of measuring is making a mix of the three methods above.
Which stakeholder will be interested in the size of the business? The
government (the rate of taxes is not the same in all business, usually
the ones who are larger demand more expensive taxes), the
investors (at the moment of invest he evaluate the size of the
business to evaluate the risk ), the workers (they would like to be
known about their peer group because if it is a large business they
will have much more chances of grow inside it, they would be aware
from promotion.), competition (who produce and sells more) and the
banks at the moment they give loans.
Growth of a business:
Why businesses grow? To obtain a better status, to control a large
share of its market, to obtain higher profits and to obtain lower
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average costs. For this, there are different forms to expand in a

business. As a first division you can difference the internal growth
with the external. The internal is the one you do by your own means,
is when a business expand an existing operation; this would be in
search of a new market (search for new people interested in the
product) or diversifying (feeding the people you already have
improving and creating more products and also if you can attract new
customers). On the contrary, the external is when a business
acquasates, takeover or merger another business.
Takeover is when the business takes the control of the other business
by buying most of the shares. Different, the acquisition is when you
buy another business already made. The difference with both is that
in the first maybe the owner of the business you buy was not agree
on you bought so you buy the rest of the shares being able to take
important decisions and you became the owner, in the second one the
consequences are the same but in this always the two parts are agree
at the moment they make the sale of the business.
About merger is different to both, this is the voluntary join of two
business turning them into only one. To be able to merger two
business there different types of integration: The horizontal in which
to business that are on the same stage of production and on the
same industry are join; the vertical in which two business that are in
the same industry but not in the same stage of production are join
(Forward (you get near the final consumer) backward (you get
closer to the raw materials)) and the lateral o conglomerate
integration in which are join two different business with nothing or a
little in common.
So....
INTERNAL
EXTERNAL
Takeover
Acquisition
Merger
Horizontal
Vertical
Forward
Backward
Conglomerate
Benefits:
Horizontal: Competition is reduce. You obtain a bigger share of the
total market and you have the opportunities for economies of scale.
Vertical forward: You get sure that your product has a place where
it can be sold, you prohibit the retailer to sell other product from the
competitors, you can control the prices, you can receive all the
comments that people make about the product at the moment they
buy it and the profit made by the 2nd business is absorbed by the
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expanded business.
Backward vertical: You get sure of having the component needs,
the raw materials, you prevent this material to be sold to other
business, you can control more or less the prices for them obtaining
cheaper prices, and the profit of the business mergered is absorbed
by the expanded business.
Conglomerate: As you are having to totally different business you
are diversifying the business and like this you are spreading the risk
of the business. Also this permits you a transfer of ideas of both
business, for example if you join with an advertisement company, this
will permit you know how to improve the image of your previous
business.
What do some business what to stay small?
The type of industry: Many industries might be very specific or
personalized and by having such a large business this will not
be possible. For example, a hairdresser attended by a famous
character, if the business expands, this worker would not be
able to be in all the shops so the attention would not be the
same.
The market size: As many of them have a specific or personal
type o industry the market sizes low, because consumers are
also limited in those business that are located far of the cities or
those who specialized or rally luxurious goods.
The owners objectives: Owners may not want to enter in the
stress or worries that having a big business imply, they prefer
staying with their business with which they are already known
and they feel more confidence. Expanding the business also
mean a lot of risks that many owner would not want to take.
UNIT 3
PRIVATE SECTOR
Business organizations: The private sector: five main forms of
bss organization in the private sector:
Sole owner: Is a business form of organization in which only
one person is the one who owned and operate the business.
Even though the sole trader can employ others the owner is the
sole proprietor. Is a common form of organization because
there are so few legal requirements to set it up. The only legal
regulations that it must follow are:
o The owner must register with and send annual accounts
to, the Inland Revenue or tax office.
o The name of the bss is significant, you have to register it
or write it in all your documents depending to the country
where you live.
o The sole trader will have to observe certain laws which
apply to all firms in that type of industry.
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Why do people set up bss in their own?

o Advantages:
You are your proper boss and you keep the profits.
You have the complete control over your business;
you have the freedom to choose your own holidays,
your hours of work, and also the wages you will pay
to your employees. Keeping your profits encouraged
you to work hard to obtain even more.
Few legal regulations to worry about.
You have close contact with your costumers and so
you are able to know their personal satisfactions
and respond quickly to the needs and demands.
You dont have to give information about your bss
to anyone except the tax office.
There are also some drawbacks.
o Disadvantages:
o No one to discuss bss matters with.
o You dont have the benefit of limited liability. In bss with
limited liability, the owners of a company cannot be held
responsible for the debts of the company their own. Their
liability is limited to the investment they made by buying
the shares. On the contrary, this type of organization has
an unlimited liability which means that the business
accounts cannot be separated from the owner's ones. The
business is not a separate legal unit and so the owner is
fully responsible for any debt the bss may have. As a
consequence, the responsibility of the debts payment is
unlimited to the value of the business; it may include
your private possessions. For example, if you are not able
enough to pay the debts with money from your business
you will be pressure to sell for example your car in order
to pay the debts. This unlimited liability may be
consequence of the not separate legal identity, for the law
the owner and the businesses are only one and this lead
in not continuity, you die, the business die. Obviously the
business can be inherited by someone but in this case the
person will be obligated to change the name and run it
again, but this would take a long period.
o Short sources of finance, the sources are limited to the
owners savings, profits made by the bss and small bank
loans (banks are often reluctant to lend sole traders bss
large sums of money).
As a consequence, these types of businesses are likely to
remain small. Therefore, they are unlikely to benefit from
economies of scale and this is also one of the reasons
why it is difficult to recruit good workers since you cannot
offer them any training or opportunities for their future
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careers.
o This type of bss cannot afford specialists and so the
owner may do many jobs that he or she is not skilled at.
o There is not anyone who will take control of the bss if you
are absent.
This type of organization is recommended to people who are
setting up a new business since they do not need much more
capital to get it going and they will be dealing mainly with the
public (personal and direct contact between the costumer and
the owner) which is often very important for the success of the
bss.

Partnership
A partnership is a form of bss organization in the private sector
run and owned by a group of people that can vary between 2
and 20 people who agree to set the business. The owners are
called partners and they are the ones who contribute to the
capital of the business. To be able to set up this type of
business, in legal terms is not so difficult, instead, partners can
do it on an informal way called verbal agreement or they can
also do it in a more formal way, creating a written agreement
called partnership agreement.
As any form of organization it has advantages and
disadvantages, as an advantage, there is more capital to be
invested as the owners are more than one and this would allow
expansion. Also the responsibility of running the business are
shared and as a consequence, the ones who form part of the
partnership can be specialist in one job and absence would not
be a problem because there would be a partner to replace you.
Moreover, all of the partners are motivate to work hard because
they all benefit from the profit make.
According to the disadvantages, the partners have unlimited
liability so if the business fall the creditors will force the
partners to sell their own properties to pay the business debts.
Also, they have no separate identity and as a consequence, no
continuity. This is due to the fact that if one partner dies the
business ends. About partners, they can disagree on important
decisions; a part of this, consulting partners takes a lot time.
On the other hand, one of the partners can be inefficient or
dishonest which would decrease the money and other partners
could suffer from it.
At the beginning I had said that as there is more capital
because there are more people than one the business could
expand but this has a limitation, as there are only 20 partners
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accepted in the business the business growth would then be

limited by the amount of capital.
Regarding again to the partners, it can exist a limited
partnership, I mean, a sleeping partner who invest capital but
dont participate in taking of decisions, in this case he has
limited liability (he can only loose what he invest). This means
a great advantage.
When to form a partnership? Partnerships are very suitable in
situations where people wish to form a business with other but
wanted to avoid legal complications, where the professional
body only allowed professional people to form a partnership,
not a company, and where the partners are well known to each
other and want a simple means of involving several of them in
the running of the business.

Private limited company

In a private limited company, capital is divided into shares that
are documents that show that someone is an owner. They are
jointly owned by the people who have invested in the business.
These people buy shares in the company and they are therefore
called shareholders. About shareholder there is a minimum of 2
and there is a no maximum which means that you can
incorporate any one you want to the business in the case you
need the money. A part from that, shareholders have limited
liability, separate legal identity, continuity and as a
consequence, it is an incorporated business.
On the other hand, shareholders must meet once a year in an
Annual General Meeting in order to choose the board of
directors that would represent them and to take some
important decision. The directors run the business and are
usually the most important shareholders. They are the ones
who allow the sale and transfer of shares because the objective
of making the business with known people in which you can
trust. This is why it is called private limited company while the
accounts must be made public, as a consequence, it must
appear LTD after the name in order to show the characteristic
just mentioned and like this, you are also able to know the limit
liability that the business has.
Again, as any business it has advantages and disadvantages. As
an advantage shares can be sold to a large number of people
which could lead to much larger sums of capital to invest in the
business. Therefore, it can expand more rapidly. Also,
shareholders who started the company are able to keep control
of it as long as they do not sell too many shares to other
people. As a consequence, take over can be prevented.
Moreover, as I first mention in the characteristics, it is an
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incorporate business, I mean, the shareholders and the

business have a separate legal identity and so it exists
continuity. Also, forming part of the characteristics of an
incorporate business, shareholders have limited liability which
encourages people to buy shares knowing that the amount they
pay is the maximum they could lose. It is important that the
people and other businesses that deal with this type of
organisation know that it has limited liability. That's why Ltd
or Limited must appear after the name.
As a disadvantage, to be able to sell a share you have to have
the authorisation of the directors, some people reluctant to
invest in such a company because they may not be able to sell
their shares quickly if they require their investment back. For
the same cause, the company cannot offer its shares to the
general public. Therefore it will not be possible to raise really
large sums of capital to invest back into the business.
Regarding to te accounts, I before mentioned they must be
made public, this mean that each year the latest accounts must
be sent to the Registrar of Companies and members of the
public can inspect them. Moreover, about the setting up of the
business each year the latest accounts must be sent to the
Registrar of Companies and members of the public can inspect
them.
o The setting up of this business: Two documents must
be drawn up: One is the memorandum of association and
the other one is Articles of association.
About the memorandum of association, it contains very
important information about the company and the
directors. The official name and the address must be
stated. The objectives must be given and also the amount
of share capital that the directors intend to raise. The
number of shares to be bought by each of the directors
must also be made clear.
Regarding to the Articles of Association, it contains the
rules under which the company will be managed.
The next step it consists on sending both documents to
the register of companies where they would check if what
it is planed is legal; if the name thought it already exist,
etc. If they find that everything is in order, a Certificate of
Incorporation (birth certificate) will be issued to allow
the company to start trading because now the business
legally exists.
**In an incorporate business each individual is a person in front de
law and the business is apart. In the unincorporated business there is
not separate identity.

16

Public limited company

This form of organisations is most suitable for very large
businesses. Most of the businesses which are well known to the
public because they own large chains of shops or many
factories are Public Limited Companies.
As in Private Limited Companies, in Public Limited Companies
the capital is divided into shares that are documents that show
that someone is an owner. The people who buy shares are also
called shareholders, they can be minimum 2 and there not exist
a maximum. Shareholders must meet once a year in an Annual
General Meeting (AGM) to elect the Board of Directors and to
take other important business decisions. The directors run the
business and are usually the most important shareholders. The
letters Plc must appear after the name so the people can now
it is a Public Limited Company.
As the letters indicate it is a limited company and besides that
it has separate legal identity reason why there is continuity. It
is an incorporate business.
Here different to the private one, shareholders are much more
important, there is a limited share capital of 50.000 pounds as
it is design for much big companies and also Shares can be sold
to any member of the public. They can be quoted and sold at
the stock exchange. This makes it public.
Advantages

Disadvantages

It is an incorporated business which

The legal formalities of forming such a
means that:
company are quite complicated, time
consuming and expensive.
The business and the
1) Draw up of two documents
shareholders have a separate
(Memorandum of Association
legal identity so if one
and Articles of Association).
shareholder dies the business
2) Registrar of Companies
can continue.
3) Certificate of Incorporation.
All shareholders have limited
4) Issue a Prospectus which is a
liability which encourages people
detailed document that invites
to buy shares knowing that the
the general public to buy shares.
amount they pay is the
5)
Raise 50,000 of share capital
maximum they could lose.
required + other things.
It has the opportunity to raise a very
6) Registrar of Companies.
large capital sums to invest in the
7) Trading Certificate.
business because there is no limit to
8) Now the business can start
the number of shareholders.
trading.
There is no restriction on the buying,
selling or transfer of shares. That is
why it is called Public Limited
Company.
17

There are many more regulations and

controls in order to try to protect the
interests of the shareholders. This
includes making the accounts public.

Some of them may become very large

so that they become difficult to control
and manage.
The Public Limited Companies usually
have a high status so it is easier to
attract suppliers prepared to sell
goods on credit and banks which lend
money.

Selling shares to the public is

expensive. Also, the publication and
printing thousands of copies of the
prospectus is an additional cost.
The original owners might become rich
by selling shares in their business but
they may lose control over it when it
goes public.

SETTING UP OF THE PUBLIC LIMITED COMPANY:

First you have to draw up two documents, the
memorandum of association and the articles of
association. The next step it consists on sending both
documents to the register of companies where they would
check if what it is planed is legal; if the name thought it
already exist, etc. If they find that everything is in order,
a Certificate of Incorporation (birth certificate) will be
issued. Now, different to the private limited company, a
new process to convert this company into public must be
started. This second part is based on the following:
A prospectus (a sort of booklet) must be issued to
advertise to customers to buy shares, and it has to state
how the capital raised from shares will be spent. This
prospectus is going to cost a lot of money as you have to
distribute it into many people.
Then, the next stage is to raise the 50000 pounds of
share capital required and other things that then you
have to take them into the register of companies where if
they accept your business and all what you do they will
give you the issue, a trading certificate that permit the
company start running. As it is public it must have in its
name PLC or plc.
Control and ownership in a public limited company:
The Annual General Meeting (AGM) is held every year and
all shareholders are invited to attend so that they can
elect their Board of Directors. Normally, Directors
are majority shareholders who have the power to do
whatever they want. However, this is not the case for
public limited companies since there can be millions of
shareholders. Anyway, when directors are elected, they
have to power to make important decisions. However,
they must hire managers to attend to day to day
decisions. Therefore:
18

 Shareholders own the company

Directors and managers control the company
This is called the divorce between ownership and control.
Because shareholders invested in the company, they
expect dividends. The directors could do things other than
give shareholders dividends, such as trying to expand the
company. However, they might lose their status in the
next AGM if shareholders are not happy with what they
are doing. All in all, both directors and shareholders have
their own objectives.

COOPERATIVES
Co-operatives are groups of people who agree to work together
and pool their resources. It is thought for small enterprises that
can't do anything alone so they join to become strong. All
members have one vote, no matter how many shares they have
bought, and help in the running of the business. The workload
and decision making are shared. In large co-operatives there is
a manager that manages the day-to-day matters of the
business. In this type of organisation, the profits are shared
equally amongst members.
o Producer co-operatives: group of workers who design
and produce products in just the same way as other
manufacturing businesses.
o Retail co-operatives: have the aim of providing their
members with good quality consumer goods and services
at reasonable prices.
o Workers co-operatives: workers are owners at the
same time. This occur many times when a business is in
bankruptcy so as a consequence they left to the workers
to manage the business instead of selling it in order to
not pay certain money to the workers if they close it. The
disadvantage is that the workers don't know how to
administrate the business.
o Agricultural co-operatives: members arrange for the
purchase of materials in bulk in order to benefit from
economies of scale. They arrange to sell the output of all
of its members at attractive prices to big costumers.

19

CLOSE CORPORATIONS: This type of business is present in

countries such as South Africa. It is like a private limited
company but it is much quicker to set up:

Maximum limit of 10 people.

You only need a simple founding statement which is
sent to the Registrar of Companies to start the
business.
All members are managers (no divorce of ownership
and control).
A separate legal unit has both limited liability and
continuity.

Disadvantages:
The size limit is not suitable for a large business.
Members may disagree just like in a partnership.

JOINT VENTURE AND FRANCHISING

To be able to be a joint ventures or a franchising you first should be a
soul trader, partnership, LTD (private limited company) or PLC (public
limited company) o cooperative.
Joint venture: Two firms get together but only for a project; they
share the capital, the risks and the profits. A part for that they
remain to be completely separate business.
Advantages

Disadvantages

Sharing of costs create the possibility of

making expensive projects.

Profits have to be shared with the joint

venture partner.

Local knowledge when joint venture

company is already based in the country.

The two businesses might have different

ways of running a business.

Risks are shared.

Disagreements over important decisions

might occur.

Franchising
A franchise is a business based upon the use of the brand names,
promotional logos and trading methods of an existing successful
business. The franchisee buys the licence to operate this business
20

from the franchisor. The franchisor is the owner of the name and of
the idea while the franchisee is the person who buys the right to use
the name and that idea, for this he must have a license. The
franchisee has to obey some rules, if he breaks the rules, the
franchisor can take his license. Also, the franchisee has to give part of
the profits to the franchisor. Regarding to the franchisor, he opt for
franchising because he wants to grow and expand without putting so
much money.
To the franchisor
The buy of the licence to
use the brand name raises
money.

To the franchisee
The chances of business
failure are much reduced
because it is a well-known
business.

Expansion of the franchised The franchisor pays for

business is much faster.
advertising.
The management of the
outlets is the responsibility
of the franchisee.
Advantages

All supplies are obtained

from the franchisor so it is
quicker since it doesn't
waste time looking for a
supplier.
Fewer decisions have to be
taken.

It provides all products sold Training for staff and

by the franchisee so it is a management is provided by
permanent source of
the franchisor.
money.
Banks are often willing to
lend to franchisees due to
relatively low risk.

Disadvantages

Poor management of one

Less independence than
franchised outlet could lead with operating a nonto a bad reputation for the franchised business.
whole business.
May be unable to make
decisions that would suit
the local area.
The franchisee keeps
profits from the outlet.

Licence fee must be paid to

the franchisor and possibly
a percentage of the annual
turnover.

PUBLIC SECTOR
The public sector is a very important part of the economy of all
countries. The term Public Sector includes all businesses owns by
the state and local governments, public services, such as hospitals
21

and schools here in Argentina. There two main types of business

organizations in the public sector, public corporations (run by the
national government) and municipal enterprises (run by the local
government).
Public corporations: They are owned by the state or central
governments. They are usually businesses which have been
nationalized. They are owned by the governments but the
governments do not directly operate the business, instead
government ministers chose a board of directors who will be given
the responsibility of managing the business. However, the
government will make clear what the objectives of the business
should be.
Objectives: Public corporations used to be given certain social
objectives, so time before they kept prices low so that everybody can
afford the service, they kept people in jobs in order to avoid
unemployment and they offer services in all areas of the country. The
problem with this is that this means much money and this services
make huge losses so as a consequence governments paid subsidies
taken from the citizens taxes. But now the big problem is that many
governments realize that they cannot continue paying this subside so
they reduce cost, and for this, if they have to, they reduce the
number of workers, they increase productivity and they want to close
loss-making services even if it means that consumers cannot afford
to this service.
This policy of reducing subsides and operating more as a private
business is called corporisation.
Advantages:
Some industries are considered to be so important that
government ownership is essential so that more people can
afford to those services.
Consumers are not taking advantage of by privately owned
monopolies.
If an important private business is failing the government can
step in to nationalize it in order to keep the business open and
to secure jobs. If the business become profitable, then the
government has the option of privatizing it
Public services such as tv and radio broadcasting are often in
the public sector, for example, BBC. Non profitable but
important programs and still be made available to the public.
Disadvantages:
There are no private shareholders to insist in high profits and
efficiency and so the profit motivate might not be so powerful.
Subsides can lead into inefficiency as managers will always
think that the government will help them I the business makes
loss. Moreover, is unfair that public corporation receive a
22

subside but private firms in the same sector no.

Often there is no close competition to the public corporations so
there is a lack of incentive to increase consumer choice and
increase efficiency.
Governments can use the business for political reasons and this
prevents public corporations being operated like a profit-making
business.

Municipal enterprises: Local governments authorities operate

some trading activities; some of these services are free to the user
and paid for out of local taxes. Also, local governments subsidy to
business that cannot cover their costs such as theaters, swimming
pools, etc. This means a lot of money, and so it means higher local
taxpayers and in order to reduce them many services are being
privatized, so the role of local government in providing good and
services is reducing.
UNIT 6
BUSINESS COSTS
All business activity involves some kind of cost. Managers need to
think about them because:
Whether costs are lower than revenues or not. Whether a
business will make a profit or not.
To compare costs at different locations.
To help set prices.
The cost is relative to the product itself. It can be direct or indirect.
There are two main types of costs (classification based on the
units of production), fixed and variable costs.
Fixed costs: Costs that do not vary with production or
items sold. They should be paid regardless of whether a
business has made a profit or not. Also known as
overheads and classified as indirect costs (the ones that
we cant identify by just looking at the product). Is an
indirect cost, overhead.
Variable costs: Costs that do vary with the amount of
goods produced. They can be classified as direct costs
(directly related to a product). Is a direct cost.
Example: Joe has a shoe shop that has an amount of $5000 of fixed
costs per month. The cost of production is $3 per pair/unit and the
price of each pair of shoe is $8; the maximum output is 2000 pairs.
OUTPUT

FIXED COST

VARIABLE
COST
23

TOTAL COST

REVENUE

0
2000

$5000
$5000

$0
$6000

$5000
$11000

$0
$16000

Total costs = fixed costs + variable costs

Difference between price and cost:
The cost is the amount of money that takes you to do
something
The value that you will give to a product or to a service to sell it
to somebody else.
BREAK-EVEN CHARTS
A break-even chart is a graph that shows how COSTS and REVENUES
(income during a period of time from the sale of goods and services.
= Quantity sold * price) of a business change with sales. They show
the level of sales the business must make in order to BREAK EVEN.
What does the graph shoes? The BEP = level of sales in which
total cross and total revenue cross. At production below the BEP the
business is making a loss. At production above this point, the firm
makes a profit.
Uses of break-even charts
Advantages:
The maximum profit can be calculated.
The expected profit or loss can be calculated at any level
of output.
The impacts of business decisions can be seen by redrawing the graph. A new imaginary situation of the
business can be shown on another break even chart.
The breakeven chart shows the safety margin which is the
amount by which sales exceed the breakeven point. It
also shows the breakeven point and the break even
output. You can observe how many units are needed to
start having profit and not making a loss.
Disadvantages:
The graph assumes that all goods produced are sold.
Fixed costs may vary with inflation or the need of new
machinery
or a bigger
factory.
Only
focuses on
the
breakeven
24

point. Completely ignores other aspects of production as

for example, the competition.
The charts used in order to do this graphs have assumed
that costs and revenues can be drawn with straight line.
This is a drawback because increasing the output may
involve paying overtime wage rates to workers or better
machinery (if they are not powerful enough and break)
BREAK-EVEN POINT: THE CALCULATION METHOD
Its possible to calculate the breakeven point without having to draw
the graph. We need two formulas to achieve this:
Break-even point = Total fixed costs/Contribution
Contribution = Selling Price - Variable Costs
BUSINESS COSTS: OTHER DEFINITIONS
There are other types of costs to be analyzed that is split from fixed
and variable costs:
Direct costs: costs that are directly related to the production of
a particular product or department.
Marginal costs: how much costs will increase when a business
decides to produce one more unit of output.
Indirect costs: costs not directly related to the product. They
are often termed: overheads.
Average cost per unit: total cost of production/total output

BREAK EVEN CHART: graph that shows how costs and revenues
of a business change with sales. They show the level of sales
the business must make in order to breakeven.
BREAK EVEN POINT: is the level of sales at which total costs
and total revenue are equal meaning that the firm will have
neither profits nor losses.
BREAKEVEN OUTPUT: be the amount of output that should be
sold to reach the breakeven point.

ECONOMIES AND DISECONOMIES OF SCALE:

Economies of scale are factors that lead to a reduction in average
costs as a business increases in size. Ways a business has to have
less average cost when it grows. There are five economies of scale:
Purchasing economies: As the business increase the size it
has to buy more components and so, because of the big
quantity bought they obtain discounts. As a result, cost of
production per unit reduces and this means and advantage
towards smaller businesses that buy in a small quantity. The
bigger the quantity, the cheaper each product gets.
Marketing: The larger your business is, the cheapest it gets to
advertise yourself. In addition you have more capital to invest.
25

This is useful since the proportion between the sales before and
after the increase of advertisement is more.
Financial: Is easier to large businesses to raise capital than to
small business because of the fact that banks often consider
less risky to lend money to big organization than to small ones.
Larger businesses are more reliable and have a better power of
negotiation.
Managerial economies: Small business cannot usually afford
to pay for specialist managers. As an advantage, large
businesses incorporate specialist managers to increase their
efficiency and help to reduce the average costs.
Technical economies: Large manufacturing firms often use
flow production methods, this apply the principle of the division
of work and the use of an expensive equipment that maybe
compare to the quantity produce I smaller firms, is not
necessary to use it in those organizations. As a conclusion,
larger firms introduce technology lije new machines in order to
increase efficiency.

However, there is a limit to economies of scale. There is a point

(optimum) in which the bigger the company gets, the less efficient it
is and this means an increase on the average cost per unit. This is
called diseconomies of scale: factors that lead to an increase in
average costs when a business grows beyond certain size:

Poor communication: It is more difficult to communicate in

larger firms since there are so many people a message has to
pass through. The managers might lose contact to customers
and make wrong decisions. More difficult to send and receive
accurate messages. It takes longer time for decisions to be
applied in all groups of workers, meaning that it will take longer
time for workers to respond.
Low morale: The lack of relationships in big firms between
workers and managers can lead to a low morale and low
efficiency among the workers who feel unimportant and not
valued by the management.

26

12
10
8
6
4
2
0

RESUME:
Production
Average costs

Disadvant
age
BUDGETS AND FORECASTS: LOOKING AHEAD
Business also needs to think ahead about the problems and
opportunities that may arise in the future. Forecasting means time to
think, plan or achieve. It will help businesses to be ready when the
moment comes. There are things to try to forecast (predictions of the
Diseconomy of
future, for example, likely future changes in the size of the market)
scale
such as:
Sales or consumer demands.
Diseconomy of scale

Economies of scale

Exchange rates appreciation or depreciation.

Wage increases.

There are some forecasting methods:

Past sales figures could be used to calculate the TREND (an
underlying movement or direction of data over time, for
example, the trend of sales data may be increasing) which can
be then extended into the future. se past numbers to calculate
what happen.
Create a line of best fit for past sales and extend it for the
future. This is drawn in a graph called: scatter diagram.
Asking a panel of experts for their opinion on what is going to
happen in the future. This is called: Panel consensus.
27

 Market research surveys are particularly useful for forecasting

sales of products which have not yet be launched onto the
market.
Why would you anticipate?
Plan the amount of money youre going to spend (so you have a
good target)
So you can be prepared for good of bad things
Gives you time to be calmed and react in a certain situation
Forecasts are predictions of the future based on past results and
known future market changes to prepare for good or bad things.
Budgets
Using a forecast doesnt tell businesses how to react to the future. In
order to satisfy that function, budgets were created. Budgets are
plans for the future containing numerical and financial targets. Better
managers will create many budgets for costs, planned revenue and
profit and combine them into one single plan called the master
budget.
Advantages:
They set objectives for managers and workers to work towards,
increasing their motivation.
They can be used to see how well a business is doing by
comparing the budget with the result in the process of variance
analysis. The variance is the difference between the budget and
the result.
If workers get a say in choosing the objectives for a budget, the
objectives would be more realistic since they are the ones that
are going to do it and it also gives them better motivation.
Helps control the business and its allocation of
resources/money.

All in all, budgeting in useful for:

Reviewing past activities.
Controlling current business activity - following objectives.
Planning for the future.
** Variance is the difference between what we expected and what
really happened.
UNIT 7
28

WHAT ARE ACCOUNTS AND WHY ARE THEY NECESSARY?

Accounts are financial records of a firm's transactions that are
kept up to date by the accountants, who are qualified professionals
responsible for keeping accurate accounts and producing the final
accounts.
Why are they necessary?
o To calculate profits and loses, to see which product is
doing, to assist in setting prices, to ensured that bills are
paid on time and costumers pay for good received and to
compare performances.
Every end of the year, a final account must be produced. This is the
union of financial records of a firm's transaction produces at the end
of the financial year that give details of the profit and loos made over
the year and the worth of the business.
Limited companies are bound by law to publish these accounts, but
not other businesses.
Who uses the final accounts of the business?
Shareholders: They are interested in knowing the profit and
losses and if the business is worth more at the end of the year.
Creditors: Wants to study the accounts to see if the company
can afford to pay them back the money they lent it.
Government: To check on the profit tax paid by the company
and also, is interested in its performance which, in some cases,
can affect the whole economy.
Other companies: Are interested if they want to take over it
and in order to compare performances:
FINANCIAL DOCUMENTS INVOLVED IN BUYING AND SELLING
The financial documents are documents that will be created as the
business buys and sells goods and services. This will be used by
accountants to:
Keep records of what has been bought and form which supplier.
Keep records of what have been sold and to which costumers
Provide the data needed to create the final accounts.
Main financial documents:
Purchase orders = order form: Request of goods for goods
or materials sent to suppliers.
Delivery notes: The costumer confirms that the goods have
been received by signing this.
Invoices: Sent by the supplier to the costumer as a request for
payment for the goods delivered. It contains all the details of
the operation.
29

 Credit and debits notes: These are only issued if a mistake

has been made.
Statements of account: Each month the supplier will see his
costumer a statement that contains a summary at all the
operations done.
Remittance advice slips: Sent with the statement of account.
In this slip the costumer indicates which invoice he is paying so
that he doesnt get charged for this amount again.
Receipts: When the customer pays an invoice a receipt should
be issued by the supplier as a proof that he had paid.
METHODS OF MAKING PAYMENT
Cash: A way of making payments for goods and services
usually used for small amounts as it is difficult to use in big
operations. The cash is easy to hide. When a business makes a
cash payments petty cash vouchers are made.
Petty cash voucher: When a business makes a cash payment
this is written out by the person in charge of the firm's cash.
This person sign the voucher to authorize payment and the
person making the purchase with cash also sign it to show that
they have received the money.
Cheque: They are instructions to a bank to transfer a specified
sum in the form of a bank balance to a named person. This is a
very common way of paying between businesses. About the
cheque unpaid, the bank will return it if there is not enough
bank balance to cover the amount unless it is supported by a
cheque guarantee card.
Credit card: It allows the costumer obtained goods or services
now but paid them in the future. If the repayments are not
made within the agreed period time then the card user has to
pay interest on the money owed on the card.
Debit card: As credit cards, it allow the costumer obtained
goods or services at the moment they pay them, but contrary
to credit cards, the money is transferred directly to the
cardholder's bank to that of the seller, here no credit is
involved. If there insufficient money the transaction is canceled.

WHAT DO FINAL ACCOUNTS CONTAIN?

The trading account: This account shows how the gross profit of a
business is calculated.
Sales revenue...X
Less Costs of goods sold..X
Gross profitX
30

Note that:
Gross profit does not take to account overheads.
Only calculate the cost of goods sold, and forget the
inventory.
In a manufacturing business, direct labour and
manufacturing costs are also deducted to obtain gross
profit.
Vocabulary up to here:
The cost of goods sold: Is the cost of the good actually sold by
the business during a time period. Goods sold are obtained by
doing the following operation opening stocks + Purchases
Closing stock.
The sales revenue: Is the income to a business during a period
of time from the sale of goods or services.
Gross profit: The difference between the cost of goods sold and
what they were sold for, the sales revenue. It is made when
sales revenue is greater than the cost of goods sold.
The profit and loss account
The profit and loss account shows how net profit is calculated. It
starts off with gross profit acquired from the trading account and by
deducting all other costs it comes up with net profit.
Gross profit...X
Less expenses.X
Net profit.X
Vocabulary:
Net profit: The profit made by a business after all costs have
been deducted from sales revenue. It is calculated by
subtracting overhead costs from gross profit.
As for limited companies, there are a few differences with the
normal profits and loss account:
Profits tax will be shown.
It needs to have an appropriation account at the end of
the profits and loss account. This shows what the
company has done with its net profits, in other words,
how much retained profit has been put back into the
company.
Results from the previous year are also included.
Appropriation account
The part of the profit and loss account which shows how the net profit
is distributed-either as drawings/dividends or as retained profit.
Dividends...X
+Retained profit.X
Net profit.X
31

So Trading profits & loss account: The purpose of this account is

to calculate and show gross profit and net profit.
(Format)

Sales revenue

XXXX (numbers)

Less Cost of Goods sold

XXXX (numbers)

Gross Profit

XXXX (numbers)

Less Expenses

XXXX (numbers)

Net profit

XXXX (numbers)

APPROPIATION Distribution of the profits

+

Drawings/dividends XXXX (numbers)

Retained Profits

XXXX (numbers)

Net profit

XXXX (numbers)

Some vocabulary:
Depreciation: The fall in the value of a fixed asset (anything that
remains in the business for more than a year) over time. It is
calculate by doing:
Straight line method:
Depreciation = (total costs of the assets the residual
value) / Live expectancy of the asset.
o E.G: 2 splits at $6000. Life expectancy 10 years. No scrap
value Dep: (12000 0) : 10 years = 1200 less every
year.
o It is also counted as an indirect cost to the business.
Drawings: Part of the profit that goes to the owner. The owner could
be partners or soul owners.
Dividends: Used when we are talking about a public or limited
company
Retained profits: Part pf the profits that remain in the business
Bad debt: A debt that you will never recover. They are written off
that is, included in expenses because there is no chance of getting
the money. E.G: maybe the debtor has died.
The residual value: The value that the asset will have at the end of
its residual life.
Non trading income: Money that doesnt come from trading. For
example, Coca-Cola pay you in order than you lead them have coca
cola written in your business.
Interest payable: Is an expense.
Tax = part of expenses

32

BALANCE SHEET
A balance sheet is a statement showing the financial health of a
business at a particular moment in time. It is usually drawn up at the
end of the financial year, but can also be created at other times. It
shows what the business owns, is owned (assets) and owes to others
(liabilities). This is what it contains:

ASSETS: Are those items of value which are owned by a

business:
o Fixed (long term) assets: assets that are likely to be kept
by the business for more than one year. For example:
equipment. Most fixed assets apart from land, depreciate
over time so the value of these will fall on the balance
sheet from one year to the next. This assets stay in the
business and help it to generate wealth.
o Current assets (short term): For example, cash, stock
and debtors (costumers who owed money to the
business) which are only held for short periods of time.
These types of assets are more easily turned into cash
(and include cash) and they are used in the process of
production.
LIABILITIES: Are items owed by the business and so, it is
responsible for paying them to the creditors. There are 2 main
forms of these.
o Long-term liabilities: Debts that a business has to pay in
a period of more than one year.
o Short-term liabilities: Debts that a business has to pay in
a period of under a year.

If your total assets are higher than your total liabilities, then you are
said to own wealth. In a normal business, wealth belongs to the
owners, while in a limited company, it belongs to the shareholders.
Hence the equation:
Total assets - total liabilities = Owners'/Shareholders' wealth
EXPLANATION OF BALANCE SHEET TERMS:
Working capital: is used to pay short-term debts, to do the dayto-day trades and known as net current assets. If a business
does not have enough working capital then it might be forced to
go out of business.
Working capital = Current assets - Current liabilities

Net assets: Shows the net value of all assets owned by the
company. These assets must be paid for or finance by
shareholders' funds or long term liabilities.
33

Net assets = Fixed assets + Working capital

Shareholders' funds: The total sum invested into the business

by its owners. This money is invested in two ways:
Shared capital: Money from newly issued shares.

Profit and loss reserves (retained profit): Profit that is owned by

shareholders but not distributed to them but kept as part of
shareholders' funds.
Capital employed: Long-term and permanent capital of a
business that has been used to pay for all the assets.
Capital employed = Net assets
Capital employed = Shareholders' funds + long-term liabilities

BALANCE SHEET FORMAT

FORMAT
Fixed assetsxxx
Less Depreciation.xxx
Total fixed assets.xxx
Current assets (with all its components).xxx
Less Current liabilities (with all its components).xxx
Working Capital.xxx
Total Net assets.xxx
Financed by
Shareholders funds (capital)xxx
Retained profits..xxx
Reservesxxx
Long-term liabilitiesxxx
Capital employedxxx
ANALYSIS OF PUBLISHED ACCOUNTS
Without analysis, financial accounts tell us next to nothing about the
performance and financial strength of a company. In order to do this
we need to compare two figures with each other. This is called ratio
analysis. Accounts can be used and analyzed to give the information
to the groups that were interested in accounts as shareholders and
creditors. By analyzing these accounts, these groups obtain
information about the performance and the financial strength of a
company.
Ratio analysis of accounts
The most common ratios used are for comparing the performance
and liquidity of a business. Here are five of the most commonly used
ratios.
PERFORMANCE:
Gross Profit margin: This is before other expenses have been
deducted and it is not the final profit of the company (its not
34

the net profit). If this percentage increases next year it would

suggest that prices have risen more than costs or that cost of
good bought in have been reduced because, probably, a new
supplier is being used or managers have negotiated lower
prices.
Net Profit margin: This is lower than the gross profit margin
because all other expenses including interest have been
deducted from gross profit to get the net profit before tax. The
higher this result, the more successful the managers are in
making net profit from sales.
Return on Capital employed: The higher this result, the more
successful are the managers in earning profit from capital used
in the business. If this percentage increases next year, it means
that the managers are running the business more efficiently
(making higher profits from each dollar invested in the
business).
Text format:
1. For every $1 of revenue/capital employed, X cents come back
as gross profit/net profit.
2. On every pound worth of goods sold/capital employed, the
company made on average X cents gross profit/net profit
LIQUIDITY:
Ability a business has to pay back its short-term debts. All tide up;
its how much money available the business has for day-to day
trades.
Current ratio: This ratio is assuming that all current assets
could be turned into cash quickly, but in reality, this is not the
case. It is quite difficult to be able to sell ALL your stock in a
short amount of time to pay debts. That is the reason we use
the Acid test or liquidity ratio
Acid Test ratio: These ratios can be used to:
- Compare with other years.
- Compare with other businesses.
However, there are still some disadvantages of ratio analysis:
Ratios are based on past results and may not indicate how a
business will perform in the future.
Accounting results over time will be affected by inflation and
comparisons between years may be ambiguous.
Different companies may use different accounting methods and
this may be a difficulty when making comparisons.
UNIT 8
WHAT IS MEANT BY CASH FLOW?
Cash is a liquid asset, meaning that it can be spent on goods and
35

services any time. Many businesses experience cash flow problems,

meaning that they do not have enough cash to do what they want to
do.
But well, what is meant by cash flow? It means the flow of money in
and out of a business. Is the sum of cash payments to a business
(inflows) less the sum of cash payments (outflows).
These are ways cash flow can occur:
Cash inflows: Sums of money received by a bss during a period of
time.
Customers cash purchases
Debtors payments

Owners own capital: money that the owner puts to his

business.
By borrowing money from an external source

Through the sell of assets of the business

From investors (shareholders) putting oney into the bussines.

Sponsors

Cash outflows: Sums of money paid out by a bss during a

period of time.
Rent, electricity, gas, wter, telephone among the expenses in
cash.
Labour related payments (wages or salaries)

Purchasing materials for cash.

Purchasing fixed assets.

Repaying loans.

Paying creditors of the business.

CASH FLOW CYCLE

A cash flow cycle shows the stages between payig out cash for labour,
materials etc. and receiving cash from the sale of goods. This is what
happens:

Explanation: Cash is needed to pay for essential materials and

another costs required to produce the good. Time is needed to
36

produce the products before they can be sold to costumers. If these

costumers received credit, they will not have to pay straightaway.
When they do pay for the good in cash, this money will be needed to
pay for buying further materials, etc. And so, the cycle continues.
Thys diagram also shows the importance of planning for cash flows.
The longer the time taken to complete these stages, the greater will
be the firm's need for working capital and cash to pay off their short
term debts.
This is what happens when a company is short on cash:
Not enough to pay for materials, therefore sales will fall.
The company will want to insist customers on paying in cash,
but they might lose them to competitors who let them pay in
credit.
There could be a liquidity crisis when it does not have enough
cash to pay for overheads (bills, rent, etc.) and the business
might be forced to close down by its creditors.
Managers need to plan their cash flow so that they do not end up in
these positions.
CASH FLOW IS NOT PROFIT Their differences:
First we need to examine the formula for cash flow:
Cash flow = Cash inflow - Cash outflow
However, when calculating profit, we also take into account credit
that debtors owe us. Therefore, a company might make $20,000 in
profit but only $10,000 is received in cash because half of it is paid by
credit card. The proft gives you the final result of an operation while
the net cash flow gives you the money you have aveilable now. The
big difference is on the aveilability of the money. As a consequence,
the unique moment where profit can equals the net cash flow is when
all the transaction of money is done with cash.
This creates something known as insolvency: Profitable business
could run out of cash because of various reasons. This is called
insolvency and it is one main reason why businesses fail. This can be
because of several reasons:
Allowing customers too long to pay back, so that they will not
have paid off the debts yet by the time the business has run
out of cash.
o Purchasing too many assets at once.
o Producing or purchasing too much stock/inventory when
expanding too quickly. This is called overtrading.
37

o Lack of planning.
o Unexpected events.
To prevent insolvency CASH FLOW FORECAST IS NEEDED.
This predict the movement of money from the business: outflows
inflows.
Cash flow planning is important because it relates to the payments to
workers and suppliers and the customer payments as well. If a
business does not plan the timing of these payments, it may run out
of cash even though it is gaining a profit! Why do you want to
aticipate it? To know how much cash you are going to have aveilable.
This will permit you to organize yourself.
A cash flow forecast can tell the manager:
How much cash is available for paying bills, loans and other
fixed assets.
How much the bank might need to lend to avoid insolvency.

Whether the business has too much cash which could be more
useful if used.

And so, looking at the inflows and outflows you can determinate the
following:
Shortages of cash
Cash flow problem
Solution: Over draft (when you overspend in your account. As the
bank takes directly the money, at the moment it enter to the bank,
the overdraft is quickly paid. This is a solution to the negative.
(current liability).
La overdraft no se acumula Te fijas el closing balance mas negativo
y eso es el minimo que vas a necesitar del overdraft. Asi te aseguras
de resolver tu problema ya que no es que si en un mes vos no
gastaste, lo que no gastaste se te acumula al otro sino que gastas lo
que gastas y por eso tenes que estar seguro de poder gastar lo que
necesitaras en el mes que mas vas a necesitar.
Surples of cash
What to do? Investment to know this gives you time to think
how to invest.
Uses of cash flow forecasts:
Starting up a business: In the first months of a business, a lot
of capital will be needed to set it up properly. The problem is,
not everybody realizes that the amount of money they needed
is much more than they had expected. Therefore, a cash flow
forecast will give them a better idea of how much money will be
needed.
38

o Keeping the bank manager informed: It needs to be shown to

the bank to inform it of the size of the needed loan/overdraft,
when it is needed, how long it is needed and when it could be
repaid. Only then will the bank give you a chance to get a loan.
o Running an existing business: It is important to know the cash
flow of a business so that loans could be arranged in advance in
order to get the least interest possible. If a firm has cash flow
problems and goes to the bank for a loan for the next day, it
will charge high interests because it knows that the business
has no choice. Also, if a business exceeds the overdraft limit
without informing the bank, it could be asked to repay the
overdraft immediately and could result in closure of the
business.
o Managing cash flow: If a business has too much cash, it should
put the cash to some good use quickly. Some examples of this
is: repaying all loans for less interest, paying creditors
immediately to get discounts.

How can cash flow problems be solved?

The easiest way is to ask for an overdraft. An overdraft is the ability
the bank gives you to spend more money than what you actually
have. This enables you to have negative numbers on your account
since you will pay it eventually.
Other ways:
Reduce credit terms with customers: cash flow can be brought
forward by reducing credit terms from 2 months to 1 month for
example.
Delay payments to suppliers: cash outflows will fall in the short
term if bills are paid later.
Sell assets: not a very efficient method since it is not very quick
and you will most likely sell them at a low price.
Bank loan
Increase your forecasted income in some way, for example, a
part time job.

39

Any cash-flow structure can be divided in 3 parts:

Part 1: Cash inflows. Here all the data of cash sales and credits sales
will be put.
Part 2: Cash outflows. In this part we record all the payments made
by the business, such as wages, materials, rent and other costs.
Part 3: Net monthly cash-flow and opening and closing balance. It
shows the net cash flow for the period of time and the cash balances
at the beginning and the end of the period (opening balance and
closing balance)
JAN

FEB

MAR

Inflows:
Cash
Sales
Credit
Sales
Total
Inflows
Outflows:
Rent
Materials
40

APR

MAY

Labour
Other
Cost
Total
Outflows
Net Cash
flow (TITO)
Opening
Balance

Is equal to
the closing
balance of
the previous
month

Is equal to
the closing
balance of
the previous
month

Is equal to
the closing
balance of
the previous
month

Is equal to
the closing
balance of
the
previous
month

Closing
Balance
(Net CF +
OB)
Now that we have a cash-flow forecast we can look at the closing
balance to see if any month we will be having a shortage of cash, or
in other words, negative cash. Or maybe we have positive cash,
called surplus.

UNIT 9
What is a finance? Finance is money. Here there are 3 example why
bss needs money:
Starting up a new business: When an individual plans to start their
own business, they should consider all of the assets they will need to
buy in order to start trading. This include the basic fixed assets and
some current assets as for example: Stock. This type of finance is
called: Start-Up Capital (finance needed by a new business to pay for
essential fixed and current assets before it can begin trading).
Expanding an exsisting business: People of sucessful businesses
will probably take the decision to expand it in order to increase
profits. With this aim, additional fixed assets could be purchased
(buildings and machinery), another business could be purchased
through a take-over and an expansion related with developing new
products to reach new markets can also occur. For the first two cases
it would be probably necessary to increase the working capital in
order to finance additional stocks and debtors. For the third case, a
substantial amouts od finance could be requird for research and
41

development.
A business in difficulties: Sometimes businesses that are not doing
so well may also need finance. For example, a loss-making business
may need to purchase new machineries in order to become more
efficent while a firm with cashflow problems may need finance to
cover short-term expensives. Is really difficult to raise essential
finance for this king of businesses.
In all this cases above, bss may need finance to pay for either capital
expenditure or revenue expenditure. Expenditures Why we
require finance?
Capital expenditure: Is money spent on fixed assets which will last
more than one year. There is a slow recover of this money. These are
needed at the start of a business and as it expands. Is related with
medium, long term finance as for example machines.
Revenue expenditure: Is money spent on day-to-day expenses
which do not involve the purchase of a long term asset. For example,
wages and rent. This is money you recover as you sell your stock or
service and is related with short term finance.
Sources of finance: How we are going to finance?
Internal: Money obtain from within the business itself.
Retained profit/Ploughed back: Profits kept in the business after the
owners have taken their share of the profits.
Advantages: Doesnt have to be repaid
Disadvantages: In one hand, new businesses will not have it and in
the other hand, small businesses can find that their profits are too
low compare to the amount of money they need. In addition, the
opportunity cost is also a disdvantage. Moreover, if you use it, you
leave your business without any reserve and so, in the case you have
partners, you have to consult it a lot with each of them.
Sales of assets: The sell of those assets which are no longer required
by the business. Rationalization
Advantages: This makes better use of the capital tied up in the
business.
Disadvantages: It may take some time to sell the asset and new
firms do not have the possibility to do it as they will not have surplus
assets to sell.
Running down stock to rise cash:
Advatages: Reduces the chances of lossing money if stock is not sold.
This reduces the opportunity cost and storage cost of high stock
levels. In addition, you get the many in a fast way.
Disadvages: It must be done carefully to avoid disappoinment of
costumers.
Owners savings: A sole trader or member of a partnership can put
more of their savings into their unincorporated businesses.
Advantages: It should be available for the firm quickly and no interest
are paid.In addition, you do not have to give any explanation to
42

nobody.
Disadvatages: Savings may be too low and it increases the risk taken
by the owners. By this way, owners could loose more money. The
opportunity cost is also a disadvantage here.
External finance: This is money obtained from individuals or
institutions outside of the business.
Issue of shares: (Only possible for limited companies). The sell of
them sometimes call equity finance as it refers to us as equities.
Private limited company can raise more capital by selling shares
privetly to family, friends or business contacts. On th epublic limited
companies, a large number of shares can be sell to the general
public. These new issues can raise very large sums of money but can
be expensive to organize and advertise.
Advatages: It is a permanent source of capital which sould not have
to be repaid to shareholders. In addition, no interest have to be paid.
Disadvatages: Ownership of the company could change hands, the
loose of power and control is a big disadvantage (In the private
limited company all the shareholders have the riht to vote at AGMs.
In the public limited company, a right issue of new shares is very
common to raise their caipital; this gives existing shareholders the
right to buy new shares in proportion to their current holding. By this
way, the problem of new shareholders changing the balance of
ownership is avoid). On the other hand, dividends will be expected by
shareholders.
Bank loans: They are design for the purchase of fixed assets that is
why is related with medium and long term finance and with the
capital expenditures.
Advantages: Usually quick to arrange and can be for varying lengths
of time. Large companies are offered low rates of interest by bank if
they borrow a large sum.
Disadvanages: Has to be repaid and with interests. In the other hand,
in order to ask for a loan you need to explain the bank why you need
the money and you have to sign a lot of papers. You will also need a
collateral that will be in charge of the payments if you dot pay them.
A security can be also required; for example, a bank may insists that
it have the right to sell some of the firm's propoerty if it does not
repaied the loan or the interests. For sole traders is even worst
because they will have to put their own house as security on a bank
loan.
Selling debentures: These are long-term (more than 25 years) loan
certificates issued by limited companies. This are loans make for
someone of the public.
Advatages: Debentures can be used to raise very long-term finance.
Disadvatages: Must be repaid with interest.
Factoring of debts: Debts factors are specialist agencies that buy the
debts of firms for immediate cash. They may offer the 90 % of an
43

existing debt and the debtor will pay them the 100% of the debt.
Advatages: Immidate cash is made available now and for sure. Now
the risk is taken by the company.
Disadvantage: The firm does not receive the 100 per cent of the
value of its debts.
Grants and subsidies from outside agencies: (eg: government)
Advatages: usually does not need to be repaid.
Disadvatages: They are often given with strings attached, for
example, the firm must be located in a particular area. As a big
disadvantage, you own a favor to the government.
Overdraft: These are arranged by a bank. Short-term finances.
Advantages:The bank gives the firm the possibility to overspend their
account. With this money, the business will be able to cover any cost
but the overspend of the account is not indefinitely; the overdraft will
vary each month according to the needs of the business. Interests
will be only payed on the ammount you overdrawn. This can be
cheaper than loans.
In additiion you dor have to specify anything to the bank and you
dont have to sign all the papers you need to obtain a bank loan.
Disadvatages: Interests rate are variable different to the loans that
have fixed rates. The bank can ask for the overdraft to be payd at
very short notice.
Renting: You hire something to use. It is for a certain period of time.
Leasing: Is a long term renting. Leasing an asset allows the firm to
use an asset but it does not have to purchasing. Monthly leasing
payments are maid. The business could decide to purchase the asset
at the end of the leasing period. Some businesses decide to sell off
some fixed assets for cash and lease them back from a leasing
company. This is called Sale and leaseback.
Advantages: The firm does not have to find a large cash sume to
purchase the assets to start with. The care and maintenance of the
asset are carried out by the leasing company. In addition, after
leasing you can buy the asset and the money you have already lease
goes to the final price.
Disadvantages: The total cost of the leasing charges will be higher
than purchasing the asset.
Hire Purchase: This allow the business to buy a fixed asset over a
long period of time with monthly payments which include an interest
charge.
Advantages: The firm does not have to find a large cash sum to
purchase the asset. You have to put down a deposite od between
15% and 20% of the value in cash and the rest will be paid month by
month.
Disadvantages: A cash deposit is payed at the start of the period.
Moreover, interest payments can be quite high. In addition, if you
stop paying and you have already paid less than the 80% they can
take you all the money.
44

Trade credit: This is when a business delays paying its suppliers, wich
lives the business in a better cash position.
Advantages: It is almost an interest-free loan to the business for the
length of time that paymentsis delayed for. Many suppliers will lend
you to pay them later to maintain you as a costumer happy.
Disadvantage: The supplier ,ay refuse to give discounts or even
refuse to supply any more goods if payments is not made quickly.
Differences between long term loans and share capital:
Loan's interests are paid before tax as an expensive
Loan's interests must be paied every year but divided do not have to
be paid if for example the firm has made a loss.
Loans must be repaid as they are no permament capital.
Loans are often secured against particular assets.
Short-term finance: This provides the working capital needed by
businesses for day-to-day operations. It is finance which is needed for
up to 3 years. Shortages of cash in the short term can be overcome
in three main ways:
Overdraft
Trade credit
Factoring of debts
Medium-term finance: This is finance which is available for
between three and ten years. It is usually needed to to purchase
machinery and vehicles. Shortages of cash in the medium term can
be overcome in the following main ways:
Bank loans
Hire purchase
Leasing
Long-term finance: This is finance which is aveilable for more than
ten years. Usually this money will be used to purchase long-term
fixed assets to update or expand the business or to finance a takeover of another firm. The main sources pf long term finance are:
Issue of shares
Debentures
Long-term loans or debt finance
*****ISSIUNG SHARES OR DEBENTURES IS NOT AN OPTION FOR
SOLE TRADERS AND PARTNERSHIPS.
How the choice of finance is made in business: What factos does
the mannager consider?
Purpose and time period: Is to match the source of finance to the
use that will be made of it. And so, the manager will ask him self
what is the finance to be spent on? It is to be used to pay for fixed
assets or is it needed to pay for a short tern cashflow crisis?
45

If the use is long term (eg: purchase of a fixed asset) the source
should be long term. If the use is short term (eg the purchase of
additional stock to cover a busy period), the source should be short
term.
Amount needed: Different sources would be used depending on the
amount of money nedeed.
Status and size: The bigger the company is the more sources of
finance they can acces, especially public limitied companies that can
make use of the shares and debentures. It depends also on the status
of the company to access to certain finance sources. Sole traders and
partnerships if they wish to expand have to depend in their own
savings and they also have to pay higher interest to banks.
Control: Owner of businesses may loose control of the business if
they ask other people to invest on their firm.
Risk and gearing: Loans increase the gearing of the business and
that is a common measure of risk that the manager is taking. The
gearing of a business measures the proportion of total capital raised
from long-term loans. If this proportion is higher than 50% the
business is highly geared. It is being financed more from loans than
from shareholders; this is said to be a risky way of financing a
business. The reason for this is that interest must be paid on the
loans wheather than the business is making profit or not. When
interest rates are high and companies profits are low the firm may
not be able to pay all of the interests. The future of the business will
be at risk. This is why banks are usually reluctant to lend to a highly
geared business. Such businesses may have to use sources of finance
other than loans.
Sources of finance: Will bank lend and will shareholders
invest? Banks and other landing institutions will makes loans
aveilable to businesses only as long as:
Financial information is provided about the firm trading record (if its
already operating) and forecasts about the future.
The forecasts show that the business is likely to remain solvent. By
this, the bank manager will be able to see id the firm is going to be
able to pay the interests on the loan and repay it when this is due.
Banks will also consider the experience of people working in the firm
and how conviving they are as likely succesful business people. Banks
wont take unnecessary risks and so, they will refuse to finance any
business that is in a risky situation.
Bussines plans
Any bank will ask for a business plan before agreeing to a loan or
overdraft; particulary if it is a newrly created firm. A business plan is
a document containing the business objectives and important details
about the operations and finance of the firm. Because of this, the
owners are forced to think ahead and plan carefully the first few
years.
46

They will have to consider what products they will want to make and
to what costumers will be destinate it, what will be their main costs
and if they will be able to sell enough products to pay them, where
will the firm be located and what machinery and how many people
will be require in the business.
Without this detalis that shows that the owner is conscious about the
future of the business, the bank won't lent money to any business.
Still, if the bank manager has some consern about the business plan,
he might refuse to lend money to the firm.
UNIT 10
WHAT IS ORGANISATIONAL STRUCTURE? It refers to the levels
of management and divisions of responsibilities within an
organisation. This data can be represented in the form of an
organizational charts. When a business grows and employs more
people, they will have to create an organizational chart to work out a
clear structure.
When employing people, everybody needs a JOB DESCRIPTION.
These are its main advantages:
People who apply can see what they are expected to do.
People who are already employed will know exactly what to do.
WHAT DOES AN ORGANISATIONAL CHART SHOW?
Levels of hierarchy: There are different levels in the business
which has different degrees of authority. People in the same
level have the same degree of authority. In the graph the
hierarchy is shown by the horizontal lines. It is the status that a
person occupates in the business.
Authority: Power Showned by the vertical lines.
Departments: Each department has its own function.
Spans of control: Amount of people (or departments) there are
directly under a hierarchy. How many subordinates a person or
a business controls. At higher levels the maximum span of
control is 8. More than that it wll mean that the cordination is
not efficienly possible. If there is so many people under
someone this will lead to a bad communication that will
generate misunderstanding and will lower the efficiency. This
will be relatd with a diseconomy of scale.
Chain of command: How power and authority is passed down
from the top of the hierarchy. When a chain of command is very
wide a diseconomy of scale is likely to happen. If the chain is
too long there will communication problems. Among them:
misunderstanding, slowness (competitors will make decisions
47

faster) and level estress.

Why is it important? It makes clear the tasks and responsabilities
of employees in order to avoid two people doing the same thing.
Advantages of an organizational chart:
It shows the relations between the different departments.
As everybody belongs to a department everybody has the
feeling of belonging.
As the chart show how everybody is linked between each other,
employees are aware of which communication channel is used
to reach them.
Every individual can see their position in the firm, knowing how
has authority over them and who they have authority over.
DELEGATION
When a manager delegates the authority to perform a task to a
subordinate he is not delegating the responsibility. Delegation means
giving a subordinate the authority to perform particular tasks.
These are the advantages and disadvantages of delegation:
When delegating tasks managers have more time to do tasks
that he considers should be left to him like making all the paper
work, etc. As they have more time they are likely to do these
tasks better.
Managers can test the success of their staff more easily.
The work becomes more interesting and rewarding for the
subordinate
The subordinate feels more important and believes that trust is
being put in them to perform a better job. They will be happy
since they will think that they have the opportuniy to show
what they are capable of.
It helps train workers.
If the subordinate fails its still the managers responsibility
The manager might feel afraid that the subordinate makes the
task better than he does
CHAIN OF COMMAND
Here are two organizations, one having a long chain of command and
the other a wide span of control. Therefore, the longer the chain of
command, the taller the business hierarchy and the narrower the
span of control. When it is short, the business will have a wider span
of control.
In recent years, people have begun to prefer to have their business
have a wider span of control and shorter chain of command. In some
cases, whole levels of management were removed. This is called de48

layering. This is because short chains of commands have these

advantages:
Communication is faster and more accurate. The message has
to pass through less people.
Managers are closer to all employees so that they can
understand the business better.
Spans of control will be wider, meaning that the manager would
have to take care of more subordinates, this makes:
The manager delegates more and we already know the
advantages of delegation.
- Workers gain more job satisfaction and feel trusted because of
delegation.
However, if the span of control is too wide, managers could lose
control. If the subordinates are poorly trained, many mistakes would
be made.

FUNCTIONAL DEPARMENTS
In large businesses (like the one in page 159), the key features that
are likely to be in an organizational chart are:
Functional departments: They use specialists for each job and
this creates more efficiency. However, workers are more loyal to
their department than to the organization as a whole.
Therefore, conflict can occur between different departments.
Managers working in these departments are called line
managers, who have direct authority and the power to put their
decisions into effect over their department.
Regional division: these are present when a business is in a
foreign country. The advantage of having a regional division is
that they use the local knowledge to their advantage.
Staff managers: these are part of departments which do not
have a distinctive function and which employ specialists in
particular areas. For example an Economic Forecasting
Manager. They report directly to the Board of Directors. They
provide specialist advice and support to the Board of Directors
and to the Line Managers. They are often very highly qualified
49

personnel who specializes in only their area.

Advantages and disadvantages of employing staff managers:
Adv: Staff managers can provide advice to line managers in
particular issues helping line managers have more time to
concentrate on their main tasks (organizing their department
and taking decisions).
Dis:
If the two groups have different points of view in subject there
may be a conflict.
Line employees may get confused on who to take orders from
(line or staff managers)

DESCENTRALISATION
A decentralized management structure means that many decisions
are not taken at the centre of the business but are delegated to lower
levels of management.
Advantages of decentralization:
Decisions are taken by managers who are closer to the action,
to the customers.
Managers who are now able to take the decisions will feel more
trusted and will have more satisfaction from their work.
As information doesnt have to be given to the top layers,
decisions are taken quicker.
Disadvantages of decentralization:
The Board of Directors is likely to lose control on important
decisions.
No common policy or consistency between departments or
divisions of the businesses as each manager is taking their own
decisions without enough central guidance.
The directors dont know whats happening in some
departments.
There are several ways of decentralization:
FUNCTIONAL DECENTRALISATION: when specialist departments
are delegated decision-making authority. The most common are
Human Resources, Marketing, Finance and Production
departments.
FEDERAL DECENTRALISATION: when authority is divided
between the different product lines of the business.
REGIONAL DECENTRALISATION: when a business has bases in
many different regions or countries and each one has authority
over its own operations.
50

DECENTRALISATION BY PROJECT TEAMS: when a particular

project is given to a team involving people from all functional
areas.

Is complete decentralization a good idea? It is dangerous to let

the lower-level management make all the decisions. Therefore, it is
wise for the central management to decide on major issues, longterm decisions, growth and business objectives. If these issues are
not centralized then there would be a lack of purpose or direction in
the business.
Centralisation:
In centralized businesses the power is center in a person or a
particular place
Advantrages:
Uniformaty
Economies of scale
Cost savings
Disadvanatges:
Decitions are taken by people who dont know about different places
than where they know.
Managers feel puppets.
DEFINITIONS:
Organizational structure: refers to the levels of management
and division of responsibilities within an organization.
Job Description: outlines the responsibilities and duties to be
carried out by someone employed to do a specific job.
Delegation: giving a subordinate the authority to perform
particular tasks. You cant delegate the final responsibility.
Delayering: eliminate a layer (a level of hierarchy).
Line managers: managers that work in functional departments
and have direct authority over subordinates in their
departments. They are able to take decisions in their
departmental area.
Staff managers: specialist advisers who provide support to line
managers and to the board of directors. They usually appear in
organizational charts with a dotted line. They have and advisory
role. They report directly to the CEO and they have no authority
nor hierarchy (not in the span of control).
Decentralized management structure: many decisions are not
taken at the centre (top) of the business but are delegated to a
lower level of management.
Centralized management structure: most decisions are taken at
the centre (higher levels of management). There is little
effective delegation.
51

UNIT 11
WHAT DO MANAGERS DO?
PLANNING: involves setting aims or targets that will give the
organization a sense of direction or purpose causing a common
feeling in the business of having something to work towards. A
manager must also plan for the resources that will be needed
(strategies). So, managers have to set aims by making
strategies to give the business a purpose. It means, giving a
direction to the business.
ORGANISING: A manager cannot do everything by himself.
Therefore, jobs must be delegated to employees. Employees
need sufficient resources to complete their job, so managers
need to organize people and resources effectively.
CO-ORDINATING: Managers need to bring people together in a
business for it to succeed. This is called co-ordination. If
different functional departments do not co-ordinate, they could
be doing completely different things which does not follow any
common plan. Managers could co-ordinate the departments by
holding regular meetings or setting up a project team with
different members from different departments.
COMMANDING: managers have to make sure that all
supervisors and workers are keeping to targets and deadlines
by providing instructions and guidance. This is telling people
what to do.
CONTROLLING: involves measuring and evaluating the work of
all individuals and groups to make sure that they are on target.
It is checking that the original aims are being met. It is the
managers responsibility to find out why targets are not being
met and then correct the problem. The manager is in charge to
make an evaluaton after an activity is round up. Here he will
have to compare the results with the expectations.
Without a good management a business would lack a sense of control
and direction, co-ordination between departments leading to a stage
of effort, control of employees and organization of resources, leading
to low output and sales diseconomies of scale.
WHAT MAKES A GOOD MANAGER?
INTELLIGENCE: ability to understand difficult ideas and dealing
with different issues. Is knowing how to act in front of any
situation.
INITIATIVE: ability to solve problems and to take control of
situations.
SELF-CONFIDENCE: to be able to lead others and set an
52

example.
ASSERTIVENESS AND DETERMINATION: to be able to take
command of others and take ideas and solutions to the end.
COMMUNICACTION SKILLS: to be able to put ideas and
messages across to subordinates in a clear way. This will
encourage them to respond positively.
ENERGY AND ENTHUSIASM: to set high standards of effort and
involvement.
CREATIVE

MANAGEMENT INVOLVES TAKING RISKS

All the tasks of a manager involve decision making. Each decision
taken by a manager has a different level of importance:
STRATEGIC DECISIONS: they can affect the overall success of
the business. They are long-term decisions. They could include
future plans for the business, long term investments, changing
the status of the business (like going public). These decisions
will be taken by senior managers or directors. Are decisions
taken once in a while.
TACTICAL DECISIONS: they are taken more frequently (e.g:
once a year) and are less important. They will not determine
the future plans of the business. They could include ways of
training new staff methods of advertising to be used, which
types of machines to purchase, etc. They are taken by middle
management.
o BOTH TYPES OF DECITIONS NEED FROM THE EXPERIENCE
AND THE KNOWLEDGE OF THE MANAGERS.
OPERATIONAL DECISIONS: they are day to day decisions taken
by a lower level of management. Previous experience can be
used to guide the decision-maker and they tend to be
repetitive. They could include staffing levels, stock levels,
methods of delivery of goods, etc.
o HERE EXPIRIENCE IS IMPORTANT.
Why is risky? They all cost time, money and opportunity cost.
The decision to do something always involves rejecting other options
(opportunity cost).
How can managers reduce risks when taking decisions?
Decision making process
Establish the objectives of the organization
1. Identify and analyze the problem to be solved: managers need
to know what they are trying to solve before deciding on a
solution.
2. Collect data on all the possible alternative solutions: this data
53

must include the limits (or constraints) on what is possible.

3. Make the financial decision and put it in to effect: called
implementing the decision. It is important to check that the
decision has been put into effect and that it is working to plan.
4. Look back to see whether the right decision was made: called
review and evaluation of the decision.
MANAGEMENT RESPONSIBILITIES IN DEPARTMENTS
Most businesses have departments organized on functional lines.
Each department has a different responsibility:
HUMAN RESOURCES DEPARMENT (PERSONNEL DEPARTMENT):
Forecasting staffing need for the business
Recruiting staff
Preparing job descriptions and job specifications
Planning and implementing staff training programmes
Interviewing and selecting staff
Negotiating with workers representatives on pay and
working conditions
Keeping staff records
Disciplining and warning staff if necessary
Ensure that the business and its employees comply with
all employment laws.
MARETING DEPARTMENT:
Market research into existing or new markets to identify
new market opportunities
Planning new products
Deciding upon the best marketing mix for each product
Keeping records of the sales of each product/service so
decisions can be made about extension strategies or
taking products off the market.
Keep in contact with customers so that products will meet
their needs
ACCOUNTING and FINANCE DEPARTMENT:
Recording all financial transactions
Collecting all of this data together and presenting it in the form
of regular accounts
Preparing budgets
Analyzing the profitability of new investment projects
Deciding on the most appropriate methods of finance
Keeping control of the cash flow of the business
PRODUCTION DEPARTMENT or OPERATIONS MANAGEMENT:
Ordering stock of material and other resources to allow
production take place
54

Developing and designing new products to allow

production take place
Locating buildings in the most cost-effective area
Deciding on production methods and machinery (the
purchase of machinery will involve the Finance
department too)
Controlling production to ensure high levels of efficiency
Maintaining the efficiency of all machinery
Making sure the quality of the product reaches the
standard expected by the consumer

ADMINISTRATION DEPARTMENT: In small businesses that might

not have the resources for separate Finance or Human
Resources departments it is common to find the Administration
department handling these tasks. Larger businesses are likely
to have a specialist Administration department. Its functions:
CLERICAL AND OFFICE SUPPORT SERVICE: handing in and
classifying daily mail, reception tasks such as greeting visitors,
accepting incoming telephone calls, responding to enquiries and
scheduling rooms for meetings, careful filling of documents and
keeping records, information and data processing.
RESPONSIBILITY FOR THE INFORMATION TECHNOLOGY
SYSTEM: the efficient operation and maintenance of this system
will not only allow information to flow accurately between
departments but also provide managers with essential data to
help their decision-making function.
CLEANING, MAINTENANCE AND SECURITY: vital to safe healthy
working conditions within the business.

UNIT 12
55

WHY DO PEOPLE WITHIN A BUSINESS NEED TO

COMMUNICATE?
We transmit messages to other people who understand the content of
the message. This process is called communication. Communication
must be EFFECTIVE: The message sent is received, understood and
acted upon in the way intended. For business, ineffective
communication can be very problematic.
If communication did not exist in a business, each worker would work
individually so the task of the manager in guiding, instructing,
warning and encouraging workers would become impossible.
What is meant by message? It's the information or instructions
being passed by the sender to the receiver.
Communication in business
For business, ineffective communication or communication failure can
have serious cosequences. Without communication, we would all be
working as individuals with no links with anybody else in the bss we
worked in. The tasks of managment in guiding, instructing, warning
and encouranging workers would become impossible.
The process of effective communication
In order to reach effective communication, four features are required:
A transmitter or sender of the message Is the person starting off
the process by sending the message. This person has to choose the
next 2 features carefully in order to make sure that communication
occurs effectively.
A medium of communication Is the method for sending the
message.
A receiver of the information The person who receives the
message.
Feedback Is the reply from the receiver which shows whether the
message has arrived, been understoof and, if necesary, acted upon.
One-way and two-way communication:
Occurs when the receiver of a message has no chance to reply or
respond to the message. Because of this, ir does not allow the
receiver to contribute to communication or to provide any feedback.
Is when the receiver gives a response to the message and there is a
discussion about it or a simple confirmation of recieipt. Both people
are therefore involved in the communication process. This could lead
to a better and clear information.
Advantages:
The sender will know if the person receivig the message has
understood it and acted upon it. If he or she has not, then perhaps
the message needs to be sent again or made clearer. Effective
communication has not taken place until the message is understood
56

by the receiver.
Both people are now involved in the communication process: The
receiver feels more part of this process. He or she can make a real
contribution to the topic being discussed or communicated. This may
help to motivate the receiver.
Internal (1) and external communication (2):
When messages are sent between people working in the same
organisation.
Is when messages are sent between one organization and another
organization or outside individual, eg: costumers.
The features and methods of both types are the same. The unique
difference is who is being communicated with.
Why external communication has to work well?
Is very important to the image and efficiency of a business. In
addition, if a bss communicate ineffectively with suppliers, it may be
sent the wrong materials and if it sends innacurate information to a
costumers, he or she may buy a product from another firm.
Different ways of communicating: The communication media.
Verbal forms of communication: Involves the sender of the
message speaking to the receiver.
Methods:
One to one talks between the sender and the receiver
Telephone conversations
Video conferencing where groups of people in different locations are
able to see and hear each other through a video link.
Meetings which could involve a few people or hundreds.
Adv:
Information can be given out quickly. It is an efficient way of
communicating with a large number of people.
There is an opportunity for immediate feedback and two-way
communication.
The message is often reinforced by seeing the speaker and his or her
body language. This does not apply to telephone conversations.
Dis:
In a big meeting, there is no way of telling wheter everybody is
listening or has understood the message.
It can take longer to use verbal methods when feedback occurs than
using written methods.
When an accurate and permanent record of the message is needed,
such as warning to a worker, a verbal method is inappropriate.
Written forms of communication: Include letters but may
57

increasingly involve the use of information technology.

Methods:
Letters used for either internal or external communication. They
should follow a set structure.
Memos (memorandum) used for internal communication. Many bss
use computers to send these through the internal electronic mail
system.
Reports detalied documents about a particular issue or problem.These
are often produced by experts working in the bss. They can be sent
to managers to read before a meeting to discuss the issue. Very often
these reports are so detailed that they could not bee understood by
all employes.
Notices pinned on boards. Used to display information with is open to
everyone. There is no certainty that they are read.
Faxes are written messages sent to other offices by electronic means
via telephone lines.
E-mail and other forms of electronic communication using informatio
technology. These have revolutionised communication in recent years.
Written messages can be sent between 2 or more people with
computing facilities. Printouts of message can be obtained is a hard
copy is required.
Adv:
There is hard evidence of the message which can be referred to in the
future. This should help to reduce disagreements between the sender
and the receiver about the contents of the message.
It is essential for certain messages involving complicated detalis
which may be misunderstood through many verbal methods. Also,
the law in many countries requires certain safety messages to be
written and displayed in offices and factories EG: written safety
methods in factories.
A written message can be copied and sent to many people. This could
be more efficient than telephoning all of those people to give them
the same message verbally.
Dis:
There is no opportunity for direct feedback. Two way communication
is either discourage or takes a great deal longer time than verbal
communication. It is also more difficult to check that the message
had been received and act upon.
Language used can be difficult for some receivers to understand. If it
is too long it may be confusing and lose the interest of the reader.
There is no opportunity of using language to reinforce the message.
Visual forms of communication: Include methods such as
diagrams, charts and videos.
Methods:
Films and videos: Often used by bss to help train new staff or to
58

inform sales people about new products.

Posters: Can be used to explain a simple but importat message by
means of a picture or a cartoon.
Charts and diagrams: Can be used in reports on letters to show
numerical data or to simplify commplicated ideas. They can be add
then to reports and other documents.
Adv:
Information can be presented in an appealig and attractive way.
They can be used to make a written message clearer by adding a
chart or a diagram to illustrate the poit being made.
Dis:
There is no feedback and the sender of the message may need to use
other forms of communication to check that the message is
understood.
Charts and graphs are difficult for some people to interpret and so,
the overall message might be misunderstood.
Formal and informal comunication
Formal communication: Channels of communication set up and
recongnised by an organisation such as a bss or a school.
Informal communication: it can be useby managers to try out the
reaction to new ideas. At other times, the informal channels can
spread gossip amd rumour which is unhelpful to managers. However,
they can not prevent the informal links between their employees.
Communication nets: Ways in which members of a group
communicate iwth each other.
Chain network Adv: It can be used to transmit important messages
from the top of an organisation to the lower levels. Dis: This often
leads to one way communication and the message can become
confused as it passes through several different levels. The more times
a message is passed on, the less accurate the message is likely to be.
Use: This can be used to communicate important company policy.
Wheel network: Adv: It can be used to communicate with different
departments or regions of a bss. A solution to a problem discovered
in one region can then be communicated to the other regions. Dis:
The departments have no opportunity to communicate directly
between themselves.
Use: This can be used to send different messages to different regional
offices of the bss.
Connected network Adv: Used to create and discuss new ideas as
two-way communication is the key feature. Dis: Can be timeconsuming and there is no clear leader or sender of messages.
Use: This can be used when the bss is looking for new bss ideas or
solutions to problems where group discussion could be most effective.
The direction of communications:
59

Downward communication: When messages are sent from managers

to subordinates. It can be used for instructions or statements on
important bss decisions. It does not allow for feedback. If these
messages have to pass through many levels of hierarchy then the
original meaning of the message could become distort.
Upward communication: When a message or feedback is passed from
subordinates to managers. Such feedback can be an esential part of
effective communication.
Workers in an organisation have much to offer by being involved in
the communication process. The organisation has much to gain when
the managers are prepeared to listen and to act upon messeges
received from those lower down the organisation.
Horizontal/ lateral communication: When people at the same level of
an organisation communicate with each other. Information and ideas
can be exchanged at both formal and informal meetings. This can be
a cause of coflict between departments.
Barriers to effective communication:
If one of the features of communication fails it would be called A
barrier to effective communication and this would cause a
breakdown in communication.
Barriers to effective communication and how they can be overcome
Barrier

Description

How the barrier can be

overcome

Problems with the sender

Language which is too

difficult is used.
Technical or Jargon
terms must not be
understand by the
receiver

The sender shoul ensure

that the message uses
language wich is
understandable. Technical
or Jargon terms should be
avoided.

The sender should make

The sender uses verbal
the message as clear as
means of
possible. Feedback should
communication but
be asked for to ensure the
speaks too quickly or
message is being
not clearly enough
understood.
The sender
communicates the
wrong message or
passes it to the wrong
receiver

The sender must make

sure that the right person
is receiving the right
message.

The message is too long The message should be as

and too much detail
brief as possible to allow
prevents the main
the main points to be
60

points being
understood. This is
again the fault of the
sender.

understood.

The message may be

lost

It is important to insist on
feedback, if not feedback
is received then the
sender assumes the
messege was lost.

The wrong channel has

been used. Eg: An
The sender must select
important message was
the appropiate channel for
put on the noticeboard
each messege sent.
wich most people did
not read
Problems with the
medium

If the message is sent

down a long chain of
The shortest possible
command, the original
channel should be used to
meaning of the message
avoid this problem.
may be lost. It could
become distorted.
This could be because for
example, a letter was sent
No feedback is received to workers asking for their
opinions. A meeting would
have been more useful.

Problems with the

receiver

Problems with feedback.

Breakdown of the
medium. E.g computer
failure.

Other forms of
communication should,
where possible, be made
available

They might not be

listening or paying
attention

The importance of the

message should be
emphasised. The receivers
should be asked for
feedback to ensure
understanding.

There should be trust

The receiver may not
between both the sender
like or trust the sender. and receiver or effective
They may be unwilling communication in unlikely.
to act upon his or her Perhaps another should be
messege.
used did not allow for
feedback.
There is no feedback
61

Perhaps no feedback was

asked for. Perhaps the

method of communication
used did not allow for
feedback.
It is received too slowly
or is distorted. As with
the original messege,
perhaps the feednack is
passing through too
many people before
being received by the
original sender of the
messege.

Direct lines of
communication between
subordinates and
managers must be
available. Direct
communication is always
more effective.

UNIT 13
MOTIVATION
People work for a number of reasons. Most people work because they
need to earn money to survive, while others work voluntarily for
other reasons. Motivation is the reason why people work, and it
drives them to work better. Therefore, managers try to find out what
motivate workers and use them to encourage workers to work more
efficiency. This results in higher productivity, increased output, and
ultimately higher profits.
Motivation theories:
Taylor (1911) based his ideas on the assumption that all individuals
are motivated by personal gain and therefore , if they are paid more,
they will work more effectively.
Maslow: He proposed a hierarchy of needs in the year 1954.
Physological needs are the basic requirements of foods, shelter,
warmth and sleep.
Security needs enssure you that you are phisically safe
Social needs are the needs to have rewardig relationships with other
employees at work
Esteem needs are the needs for self respect and to be respected and
value by other people.
Self-fulfilment / self-actualisation needs are being able to be creative
and feeling that you have done a good job. In practice, very few
reach this level.
McGregor (1960) identified two types of managers, the ones who
believed in the thoery X and the ones who believed in the theory Y.
X:
The average theory X person will dislike work and will try to avoid it.
62

People must be pressuried to work and threatened with puishment if

they dont work
People who will not want responsability
They are not ambitious and see securoty as their main needs
Managers here believed that motivation is related with external
factors such as pay schemes. They will look to introduce incentives
and to have supervision to encourage employees to work hard.
Related with Tylor
Y:
They think work is natural and doesn't dislike it in principle
They will not need to be supervised and will use their own initiative;
they are commited to hard work
They will accept responsability and will then seek responsability
Their greatest need is self actualisatiom and they have great
creativity.
Managers here believed that motivation is related with an internal
factor. They will try to provide a satisfactory environment to their
workers.
Why do people work?
Motivating factors Is the responability of the managers and often
the human resources department to movitivate the workforce in order
tio increase productivity. There are 3 factors which can motivate
employees:
Monetary rewards non monetary rewards introducing ways to give
job satisfaction.
Monetary rewards:
Wages: Is payment for work, usually paid weekly. Wages clerks are
often employed to control the payment of the wages. Usually, if
employees work longer that what is establich they will be paid
overtime and this include and extra amount to the refular number per
hour.
Time rate: Payment by the hour.It is often used when it is difficult to
meassure the output of the worker.
Adv: Makes it easy to calculate the workers wages and the worker
knows exactly what they will be paid for working a certain period of
time. The hours worked are often recorded on a time-sheet which
must be filled in and used to calculate the wages.
Dis: This system thakes time. Good and bad workers get paid the
same amount of money and often supervisor are needed in order to
chek that workers still working efficiantly. As a consequence, it is
expensive. In addition, a clocking-in-system is needed to determine
the number of hours work by the employees.
Piece rate: Workers are paid depending on the quantity of products
made and so, the more they make, the more they get paid. A basic
63

rate is usuallly paid with additional money according to the worker's

production.
Piece rate can be applied to bonus system where employees who
produced more than a set target of output can be rewarded.
Adv: It encourage workers to work faster and produce more goods.
Dis: Can only be used where it is possible to measure the performace
produced by an individual or a team. As a problem, workers may
concentrate on making a large number of products and ignore quality.
As a consequence, this system may include a quality cotrol which is
expensive. Poor quality goods can demage the image of the bss.
In addition, workers who are careful in their work will not see this as
fair and so, friction between employees may been caused.
Also, if the machinery breaks down, the employees will earn less
money and because of this, workers are often paid a guaranteed
minimum amount of money.
Salaries: Is payment for work, usually paid monthly. They are not
paid in cash. It is usual for white collar workers. It is calculated as an
amount of money per year which is devided by 12.
As an advantage for the employer, they will have the money in their
bank account for more time that they will have it if they pay wages
which they have to do it 4 times in a month. In addition, they will
have to calculate the salary just once contrary to wages.
Salaries are usually a standard rate but workers may gain more many
if some of the following rewards are made.
Commision: Is payment related to the number of sales made. It is
often paid to sales staff. Fistly, they may be paid a small pasic
payment.
Adv: Workers receive more money if they sell more and so, the bss
take advantage of their motivation as more goods are sell.
Dis: If the sales staff are very persuasive and persuade people to buy
good they will not really want, the bss may get a bad image. Also, it
may be stressful for the sales staff because if they have a poor month
they will receive less pay.
Profit sharing: In addition to a basic salary, the employee will recive a
share of the profits. If the bss is succesful, all the employees may
receive a bonus. As a result, this will motivate the workers because is
the bss does well, then they will all share in its success. It is often
used in the service sector.
Adv: Employees may feel a greater sense of being part if the bss and
that their efforts are being rewarded.
Bonus: Usually a lump sum shich is paid to workers when they have
worked well. It can be payed at the end of the year or at intervals
during the year.
Performace-related pay: It links the pay awarded to employees with
their level of effectiveness in the oranisation. Is used where output
can not be measured. To asses their performance, managers often
use a system of appraisal (method of assesing the effectiveness of an
64

employee where an employee's immediate superior observes their

work, talks to their collagues and then carries out an interview with
the employee to discuss their progress and their efectiveness).
Non monetary rewards:
Firms may have non monetary rewards such as use of compny cars,
houses, expense accounts, or discounts on the firm's products. These
are also called perks or fringe benefits. Non monetary rewards may
include:
Children's education fees paid
Discounts on the firm's products
Health care paid for
Car
Free accomodation
Share options
Generous expense accouts (food and clothing)
Pension paid for
Free trips aborad/holidays.
Job satisfaction
Is the enjoyment derived from feeling that you have done a good job.
Employees have different ideas about what makes their job satisfying.
They include: The amount of money paid to an employee,
opportunities for promotion, working coditions, fringe benefits, the
way that the employee is treated, the amount of working hours, the
colleagues, the nature of the work itself, the level of responsability,
the sense of achievemnt derived from the job, the recognition for a
good work, the chance for trainig and the status of the job.
There are several ways in which a bss can increase the job
satisfaction of their employees.
Job rotation: Involves workers swapping round and doing each
specific task for only a limited time and the changing round again.
This are simple tasks. This means an avd for the manager when
workers are absent.
Job enlargement: Is where extra tasks of a similar level of work are
added to a worker's job description. This will just increase the variety
of the work, it does not mean more responsability or extra work.
Job enrichment: Involves looking at jobs and adding tasks that
require more skills and/or responsbility. Here may be necessary
adittional trainning.
Autonomous work group or teamworking: Is where a group of
workers is given responsability for a particular process product or
development. They can decide as a group and so, the workers can
become more involved in the decision making and take
responsability for this process. This gives a feeling of control over the
tasks and employees feel more commited. It also gives a greater
sense og belonging to the company.
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LEADERSHIP
A good leader in a large bss is someone who can inspire and get the
best out of the workforce, getting them to work toward a common
goal. There are three main leadership styles (different approaches to
dealing with people when in a position of authority).
Autocratic leadership: The maanger expects to be in charge of the bss
and to have their orders followed. They keep themselves separate
from the rest of the employees. They make virtually all the decisions
and keep information to themselves. Communication in the bss is
mainly one way, top down and the workers have little or not
opportunity to comment on anything.
Laissez-faire leadership = leave to do: Tends to make the broad
objectives for the bss known to employees, but then they are left to
make their own decisions and organise their own work.
Communication can be difficult in this type of organisation as clear
direction wil not be given, The leader has only a very limited role to
play.
Democratic leadership: Will get other employees incolved in the
decision-making process. Information about future plans will be
openly discussed before the final decision will be made.
Communiation will be both, top doen and bottom up.
Fromal and informal groups:
Informal gropus: They usually join together by choice. Is a group of
people who form independently of any official groups set up within
the bss and who have similar interests or something else in common.
For a bss to worw effectively, informal groups needs to be handled
carefully. Regualr meetings between managers and employees, joint
fund-raising efforts, activity weekends for staff, and improved
communication are all ways of using informal groups in a positive
way.
Fromal groups: A group designated to carry out specific tasks within a
bss.
UNIT 14
THE WORK OF THE HUMAN RESOURCES DEPARTMENT
It's responsabilities are:
Recruitment and selection: Involves selecting and attracting the
best workers for vacancies that arise.
Wages and salaries: Must be enough to motivate or attract and
retain workers.
Industrial relations: There must be effective communication
between departments.
Training programmes: Must meet the training needs of
employees and accomplish business objectives.
Health and safety: Must do things according to the law on
66

health and safety.

Redundancy and dismissal: Involves shedding employees either
because the business changes in some way or because the
employee is not satisfactory. Must be sure to comply with all
the laws on redundancy, dismissal and disciplinary matters.
RECRUITMENT AND SELECTION
Workers are needed when a business starts up, expands or an
existing employee leaves. Businesses use the recruitment process to
successfully employ the right people. This process is usually
undertaken by the HR department, but in small business, HR
departments do not exist since the businesses employ too little
workers for it to be of much use. Here is a diagram summarizing the
recruitment process:
Vacancy arises.
A job analysis is done, which identifies the responsibilities and
tasks of the job.
A job description lists that responsibilities and tasks to the
candidates who apply for the position.
A job specification outlines the required qualifications, expertise
and experience a candidate needs so that they can be accepted.
The job is advertised in the appropriate media. (e.g.
newspapers)
Candidates fill out application forms, which are short-listed so
that only the best candidates remain.
Interviews are held with remaining candidates, and the ones
suitable for the job are selected.
Vacancy filled.
On of the first stages of the recruitment process is to carry out a job
analysis to studied the tasks and activities to be carried out by the
new employee. In resume, to make a job analysis means to identify
and recor the responsabilities and tasks relating to a job. This should
be easy for a job that needs replacement, but not so much for a job
that has just been created.
Once all the details about the job have been gathered, a job
description needs to be drawn up. A job descrption outlines the
responsibilities and duties to be carried out by someone employed to
do a specific job.
This job description has several functions:
Given to candidates so they know exactly what the job involves.
Allows a job specification to be drawn up to see if the
candidates match up to the job, so that people with the right
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skills will be employed.

Once someone has been employed, it shows whether an
employee carries out the job effectively or not. It helps solve
disputes between employees and employers about wages,
working hours, etc.
The job description for any business will usually contain:
The title of the job.E.G: secretary.
The department of the bss in which the person will work. E.G:
Marketing department or restaurant.
Who will be in charge of the employee.
Who the job-holder is responsible for.
The purpose of the job (job summary).
The main duties of the job.
Job description sometimes contains information about:
The conditions of employment working hours, wages, pension
schemes.
Training that will be offered.
Opportunities of promotion.
JOB SPECIFICATION
After the job description has been drawn up, the qualifications and
qualities necessary to undertake the job can be specified. This will be
call the job specification, a document which outlines the
requirements, qualifications, expertise, physical characteristics, etc.
for a specified job. The listed requirements will usually include:
The level of educational qualifications.
The amount and type of experience.
Special skills, talents or knowledge.
Personal characteristics. (e.g. type of personality)

ADVERTISING THE VACANCY

The next stage is on how to get people to know that you have a job
to be filled.
Internal recruitment: When a vacancy is filled by someone who is
an existing employee of the business.It might be suitable for
employees seeking promotion. It might be advertised in the
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noticeboard or in a newspaper.
Advantages of internal recruitment:
Saves time and money.
The candidates' reliability, ability and potential are already
known.
The candidates know the expectations and rules of the
company.
Motivates other employees to work harder to get promoted too.
Disadvantages of internal recruitment
No new ideas or experience come into the business.
May create jealousy and rivalry between existing employees.
External recruitment: When a vacancy is filled by someone who is
not an existing employee and will be new to the business.
Most vacancies are filled with external recruitment, which always
involves advertising the vacancy. Here are some suitable media of
advertising:
Local newspaper: Usually for clerical (office) and manual
workers. These people are plenty since the job does not require
too much skill.
National newspaper: Used to find workers for senior positions
that require a lot of skills, experience and qualifications. It can
be read by people anywhere in the country or overseas. As the
positions will be well paid, people will be willing to move to
another part of the country.
Specialist magazines: Used for particular technical specialists
such as physicists. Can be used to hire people in the home
country or abroad.
Recruitment agencies: Keeps details of qualified people, and will
send the suitable applicants to interviews when a business asks
for a worker. Many businesses prefer to use recruitment
agencies to find them workers because it is easier. However, it
is expensive since their fee is based on a percentage of the
workers pay.
Government job centres: Place where businesses can advertise
their vacancies. These vacancies are usually for unskilled or
semi-skilled workers.
POSSIBLE EFFECTS OF GOVERNMENT LEGISLATION ON THE
RECRUITMENT PROCESS
Many governments pass laws to create equal employee opportunities.
They state that all employees should be treated equally in the work
place and receive the same salary for doing the same job. People of
any sex and people with disabilities are treated equally. Therefore,
businesses need to be careful when advertising and treating their
employees because they could be prosecuted and fined.
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JOB ADVERTISEMENT
This is what a business needs to decide when drawing up an
advertisement:
What should be included.
Job description
Job specification
Where the ad will be placed.
How much the advertising will cost and is it too expensive?
APPLICATIONS FORMS AND CVS/RSUMS
When a person applies for a job, he will have to fill out an
application form, or write a letter of application and enclose a
curriculum vitae (CV) or rsum. Cvs are descriptions about one's
qualifications, experience and skills written in a standard format.
Businesses will use application forms and CVs to see whether an
applicant match the job specifications or not. The closest matching
applicants are invited to interviews in the selection stage. A short-list
is then drawn up.
These are what CVs should contain (well laid out and clear):
Name
Address
Telephone Number
Date of Birth
Nationality
Education and qualifications
Work experience
Positions of responsibility
Interests
Names and addresses of references.
The letter of application should contain briefly:
Why the applicant wants the job.
Why the applicant feels he/she would be suitable.
Applicant forms ask for the same information as the application letter
and CV, but may ask for other types of information.
INTERVIEWS
Applicants who are invited to interviews will have provided the names
and addresses of their references. These people can give their
opinions on the reliability, honesty and skills of the applicants and
they will be likely to tell the truth because the applicants will not
know what they have said.
Interviews are the most popular form of selection. However,
interviews are not always the most reliable process of selection. They
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aim to find out these things:

The applicant's ability to do the job.
Personal qualities that are an advantage or a disadvantage.
General characteristics and personality whether they can "fit
in"?

These are the likely questions in an interview:

Why have you applied for the job?
What do you know about this company?
What qualities do you have to offer the company?
What ambitions do you have?
What are your hobbies and interests?
Do you have any questions to ask us?
Interviews can be one-to-one, two-to-one, or a panel of people to
interview people which is used to select people for important jobs.
Some businesses include tests in their selection:
Skill tests: To test the ability to carry out certain tasks.
Aptitude tests: To test how easily candidates can be
trained/learn new things.
Personality tests: To test for people who have specific personal
qualities which will fit into jobs e.g. that has a lot of stress;
requires you to work with a team.
Group situation tests: To test how well applicants work with
other people.
REJECTING UNSUCCESSFUL APPLICANTS
When applicants fail to get the job, they should be informed and
thanked for applying.
SUMMARY OF THE RECRUITMENT AND SELECTION PROCESS
Analyze the exact nature of the job and the duties to be
undertaken.
Design a job description
Design a job specification
Advertise the vacancy
Send out application forms to the applicants or read curriculum
vitaes and letters of application.
Produce a short-list from the replies of those to interview and
take up references.
Hold interviews and selection tasks.
Select suitable applicant and offer them the job. Reply the
unsuccessful applicants.
Organize induction training for the successful applicant.

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TRAINING
Training is often needed to:
Introduce a new process or equipment.
Improve efficiency.
Provide training for the unskilled workers to make them more
valuable to the company.
Decrease supervision needed.
Improve the opportunity for internal promotion.
Decrease the chance of accidents

Employees should know the benefits of training for them to take it

seriously. Training usually needs to achieve one or more of the
following:
Increase skills.
Increase knowledge.
Change attitude, raise awareness.
There are three main types of training:
Induction training:
Introducing a new employee to their business/management/coworkers/facilities.
Lasts one to several days.
On-the-job training:
Employees are trained by watching professionals do a job.
Only suitable for unskilled and semi-skilled jobs.
Cuts travel costs.
The trainee may do some work.
The trainer's productiveness is decreased because he has to
show things to the trainee.
The trainer's bad habits can be passed to the trainee.
Off-the-job training:
Workers go to another place for training (e.g. school).
Methods are varied and usually more complex.
Usually classroom training.
Employees still work during the day.
Employees can learn many skills. They can be moved around
the company when the need arises.
WORKFORCE PLANNING
A business will need to forecast the type and number of employees
needed in the future. This depends on the firm's growth and
objectives. Once it has been decided how many employees will be
required and what their skills need to be, the forecast can be done
by:
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Finding out the skills of all current employees.

Counting out people who are leaving soon (e.g. retirement).
Talk to staff about who would want to retrain for new jobs.
Provide a recruitment plan (how many new staff are needed,
and how they should be recruited, internal or external)

DISMISSAL AND REDUNDANCY

There are some situations when businesses need to reduce the
number of employees they have. This can be done in two ways:
Dismissal:
A worker is fired for unsatisfactory work or behavior.
Fault of the employee.
Redundancy:
Employees are no longer needed.
Not the fault of the employee.
Some reasons are:
A business is closing down a factory.

A business wants to cut costs by reducing the number of

employees.
A business has merged/taken over another and there is
too many staff in certain departments.
New machinery replaces workers.

o Employees are given some money to compensate for their

lost job:
The money is often negotiated with trade unions.
Some governments have laws that make businesses pay
for their workers this way.
o If only some employees are to be made redundant, trade
unions will agree with the fairest way to see who goes.
These terms are negotiated with the HR department.
o Sometimes there will be voluntary redundancy by members.

Older workers.

There may be some who wants to leave because they

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have other ideas.

Unit 15
Employee and employer assciations
In smaller businesses, if employees have any problems they can talk
directly to their employer. However, in larger businesses that employ
many people, it becomes extremely hard to do so. It is also hard for
the Human Resources department to make decisions when they have
about 500 employees (e.g. who will get a pay rise?). It becomes
much easier if decisions are negotiated with a trade union, and
employee association that represents them. This saves the
management a lot of time because they do not have to see individual
employees to discuss problems. Employees might not be treated fairly
at work. They may be overworked and underpaid. Trade unions
have the role of bargaining with the HR department for better
working conditions, conditions of employment and better pay.
** Definition of trade union: A group of workers who have joined
together to ensure their interests are protected.
TRADE UNIONS
Employees with similar interests (higher pay, pleasant environment,
proper training) form a trade union. Trade unions are a form of
pressure group that has the ability to influence business activity.
Forming a trade union can help employees to achieve improvements
in these different aspects.
There are four main types of trade unions:
Craft union: Represents a particular type of skilled worker.
General union: In a trade union which represent workers from a
variety of trades and industry. They are often unskilled but also
include semi-skilled workers.
Industrial union: Represents all types of workers in an
particular industry.
White-collar union: Represents non-manual workers. For
example, office workers, management and proffesional people.
WHY DO WORKERS JOIN A TRADE UNION?
Unions have a shop steward, who is an unpaid representative of the
union at factory/office level. When someone is new to a job they may
ask if they may want to join. If the person joins, they will have to pay
an annual subscription. This money will be used for employing union
officials who will represent the views of the employees.
Advantages to an employee of a trade union membership:
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Strength in numbers.
Improved conditions of employment: holidays, rates of pay.
Improved the environment where people work: health, safety,
noise.
Improved benefits for members who are not working because
they are sick, retired or have been made redundant
(retrenchment).
Improved job satisfaction by encouraging training.
Advice/Financial support if a worker is dismissed unfairly/made
redundant, have received unfair treatment or is asked to do
something not part of their job.
Benefits that have been negotiated or provided for union
members such as discounts in certain shops, provision of
sporting facilities or clubs.
Improved fringe benefits: discounts, etc.
Employment where there is a closed shop, which is when all
employees in a business must belong to the same union.
Trade unions also seek to:
Put forward their views in the media to influence government
decisions on pay, employment, etc
Improve communications between workers and managers.

CLOSED SHOP
A closed shop is when all employees must join one union in order to
be employed. It is because its members feel is unfair when nonmembers receive the benefits negotiated by the trade union. Trade
unions also gain greater strength if all the employees are members of
the union. However, many people think that it is unfair since they are
forced to join they should be able to make their own decisions.
SINGLE-UNION AGREEMENT: is when a firm will deal with only one
particular trade union and not others.
Some companies have a single union agreement, when a business
only agrees to deal with a single union. Any employees who want to
join a union can join this union. It is becoming more popular
nowadays because many employees are becoming multi-skilled, and
do not know which union to join. This makes the employees more
flexible and the business can use them in different areas of
production as and where needed.
Advantages to the employee of a single-union agreement:
Discussions are clearer if there is only one union to deal with.
Most employees are in one unionand not spread across several
75

unions and therefore have greater power.

No disagreements between different unions.
A better working relationship should develop between the union
and the management.
Disputes are solved more quickly as only one union is involved
in negotiation.
Advantages to the employer of a single-union agreement:
Discussions are clearer if there is only one union to deal with.
A better working relationship should develop between the union
and the management.
Disputes are solved more quickly as only one union is involved
in negotiation.
It is easier to agree to changes and less time is wasted in
argumentation.
A better relation between management and employees means
fewer industrial disputes wich is better for both, employees and
employers.
THE STRUCTURE OF A TRADE UNION
The structure of different unions vary, but most elect a President or
General Secretary to work full-time for and get paid by the union.
They work at the union's headquarters. If the union is large, there
will be union officials to take cared of members in different branches.
Each branch represents its members in one work site, one factory, or
one employer. Each branch has a representative. Unions are usually
democratic and their union officers are voted up by the members.
EMPLOYER ASSOCIATIONS: Employer associations are groups of
employers who join together to give benefits to their members. Also
known as Employer Federations or Trade Associations.
Employers join in what is called employer associations/employer
federations/trade associations. Like trade unions, employer
associations are made up of businesses and employers who all pay
annual fees for their benefits.
Advantages of joining an employer association:
They negotiate with trade unions on behalf of their members.
They give advice to members on issues such as employment
laws,health and safety, taxation laws, etc
They act as a pressure group and have greater strength,
because they are a large group to put arguments to
government when changes are requested.
Sometimes these organisations sheare ideas and they will help
each other, usually when they are not in direct competition or in
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different sectors of the market. They may share research

facilities when one small firm alone could not afford to do this
research.
Strength in numbers, they want to influence government
decisions.
They can organize bulk buying for members and get discounts.
EMPLOYER ASSOCIATIONS AND THE GOVERNMENT
Employer associations represent similar wants of businesses, and will
try to influence the governments to give better conditions for
businesses to prosper:
They want the government to control things such as inflation,
law and order, health and safety, and education for the
workforce.
Lower taxes.
More freedom for businesses.
Fair competition.
Good transport infrastructure.
Access to overseas markets.
Reliable source of power.
COLLECTIVE BARGAINING: is negotiations between one or more
trade unions and one or more employers (or employers associations)
on pay and conditions of employment.
This is when representatives of different interest groups negotiate
and a collective agreement is made. The bargaining can be with
businesses or with the government.Collective bargaining in
businesses usually means that the representatives of one or more
trade unions negotiate with one or more employers or employer
associations to come up with a mutually acceptable agreement on
conditions of employment.
Definition of negotiation: Is another name for collective
bargaining. It is where there is joint decision making involving
bargaining between representatives of the management and of the
workforce with a firm. The aim is to arrive at a mutually acceptable
agreement.
Why trade unions want wage increases:
Inflation.
o It is difficult to recruit qualified workers and a pay rise is
necessary to attrack the right sort of people.
o Pay differentials need to be maintained. There will be distinct
differences between the wages rates of differents skills,
unskilled and semi-skilled workers, and also between public and
privates emploees.
o The unions argue that workers need to be compensated for the
changes, e.g. new machinery.
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o If there is increased productivity, wages should increase too.

There are productivity agreements, managers and trade unions
agree to raise prices for increased productivity. They agree an
increase in benefits, in return for an increase in productivity.
Often agreements take place and the "middle path" is taken.
However, this does not always happen and if the workers and
unsatisfied with the agreements, they will use industrial action.
INDUSTRIAL ACTION: Action taken by the trade unions to decrease
or halt production.
There are various forms of industrial action that try to influence the
decisions of employers. Here are some of their most comment forms:
STRIKES: When employees refuse to work.
Strikes are when workers stop working and leave the workplace to
protest against things.
Token strike: Stoppage for an hour, a few hours or half a day to
show strong feelings.
Selective strike: Only a few workers go on strike. They are
chosen by the union to cause as much disruption as possible.
All out strike: All union members stop working and wait until a
dispute has been settled.
Unions have to pay their members out of strike funds as long as the
strike has been approved by the union. All members vote to see if the
strike is favorable or not.
PICKETING: When employees who are taken industrial action stand
outside their place of work to prevent or protest at the delivery of
goods , arrival and departure of other employees, etc.
This is when workers stand outside the factory holding signs to
protest and stop any people going in and out as well as goods. This
can halt the production process. The strikers gain publicit and give
the firm a bad image. This puts pressure on the firm to settle the
dispute.
WORK TO RULE: : When rules are strictly obeted so that work is
slowed down.
This is when workers stick rigidly to every rule and regulation in the
business so that it slows down the production process. They still get
paid since they are technically doing nothing wrong, but this still
causes a lot of disruption in the workplace.
GO SLOW: When employees do their normal tasks but more slowly
than usual.
All workers deliberately do things very slowly.
NON-COOPERATIVE: Is when employees refuses to comply with
new working practices.
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Workers refuse to work with any new rules or follow any new
practices they do not approve of.
OVERTIME BAN: Employess refuses to work longer than their
normal working hours.
Workers refuse to do any overtime. This might damage the business
if they need to complete some orders quickly.
Possible harmful consequences of industrial action:
For employers:
Loss of output.
Loss of profit.
Loss of customers.
Poor reputation.
Bad image.
For employees:
Loss of wages.
They might lose their jobs if the company suffers low profits.
For customers:
They need to find another supplier which might cost more
(production is stopped)
Shortage of products.
Deliveries not made.
For other businesses:
May lose income.
May not have materials to produce goods.
For the economy:
Workers have less money to spend.
Less tax revenue.
Country gain bad reputation for late deliveries.
Workers may be made redundant.
Exports may be lost and imports increased.

EMPLOYER'S POWERS: A no-strike agreement is reached when

trade unions and management agree to have pay disputes settled by
an independent arbitrator instead of taking strike action.
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However, employers can do something about the situation. Usually,

they will sign a no-strike agreement with the union which also
involves pay rises. The pay rises are determined by an arbitrator, an
independent person who represents both sides and decides on the
best decisions possible. Again, he will most likely choose the "middle
path".
Nevertheless, if strikes do happen, here are some things
employers can do:
Dismiss all workers: This leave the company in a very terrible
position since they can't produce goods or deliver goods.
Lock-out the workers: Stop workers from coming to work or get
paid. Used to counter work to rule and go slow strategies. The
employer will save on wages by not paying them. Employees ae
locked out of their workplace by the employers.
Institute a pay freeze: Used if employees are refusing to follow
new rules, practices or operate new machinery.
WORKER PARTICIPATION: Occurs when employees contribute to
decision making in the business.
The management needs to let everyone feel that they are part of the
business. This means that managers will let workers participate in
business decisions.
There are several ways of doing this:
Worker directors: Some workers become directors, but they are
not allowed to attend all board meetings.
Works councils: These are commites of workers who are
consulted or informed on matter that affect employees. Works
councils are called European committees in Europe, and are
becoming more common there. Multinationals with more than
1000 workers or 100 workers per branch will have to create a
works council and will have to always consult it when making
decisions affecting employees.
Quality circles: This is often used in Japanese companies, where
workers regularly debate on how to improve quality and
efficiency.
Using a democratic style of leadership: Workers are delegated
tasks and are consulted in business decisions.
Advantages of worker participation
It increases the flow of information and improves relationships
between the employer and the employee.
It increases motivation.
It increases job satisfaction.
It benefits the company since it can use knowledge from
experienced workers.
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Disadvantages of worker participation

It is time consuming.
Workers may lack necessary technical knowledge.
If representation is done via trade unions, non-union members
won't be affected.
There could be conflict of interests.
Unit 16
WHAT IS MARKETING? A market is where buyers and sellers come
together and exchange their products for money; this will not usually
be a single location. It can be in the streets, on the internet, in shops
around the world, etc Customers and sellers exchange both goods
and services for money.
PRODUCT-ORIENTATED AND MARKET-ORIENTATED
BUSINESSES
PRODUCT ORIENTATED: A product orientated business is one
whose main focus of activity is on the product itself. It focuses on the
quality and price of the product before finding a market for it to sell
in. These type of businesses usually produce basic needs. People may
not want the product until it has been developed and advertising has
persuaded them to buy it.
MARKET-ORIENTATED: Other big companies cannot afford to
produce a product that will not sell, so they have to do market
research first to find consumer wants before developing a product.
They are called market-orientated businesses: they carrie out
markets research to find out consumers wants before a product is
developed and produced.
They will need to set up a marketing budget for this, which is a
financial plan for marketing of a product or product range for some
specified period of time. It contains the amount of money the
Marketing department may spend on marketing. In this way they are
able to take advantage of new market opportunities which may arise.
WHAT IS MARKETING
Marketing is the management process which identifies consumer
wants, predicts future wants and then goes about satisfying them
profitability. In other words, businesses try to satisfy wants in the
most profitable way possible. Marketing covers a wide range of
activities such as: advertising, packaging, promotion, etc
Marketing usually means going out and finding out what consumer
requirements are, because if they do not satisfy customers needs,
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businesses will be unlikely to sell many of their products. Once the

consumer requirements have been identified, these customer needs
must be met by new products being developed or changes to existing
products.
Functions of marketing:
Find current consumer requirements
Predict future consumer requirements
Help to make profits for the business
Satisfy consumer needs
THE MARKETING DEPARTMENT
Most businesses will have a Marketing department, which will have a
Marketing Director. He will be in charge of things such as R&D,
distribution and pricing. Here is an organizational chart showing what
departments the marketing director controls:
Sales department: Responsible for sale and distribution of
products for each region. There may also be an export
department.
Research and Development department: Responsible for finding
out consumer wants and developing new products. They also
need to find ways to improve an existing product.
Promotion department: In charge of advertising and promotion.
It will need a marketing budget which limits the amount of
money it can spend.
Distribution department:It transports products to their markets.
FIJARME TABLA DE LA PAG 236.
THE OBJECTIVES OF MARKETING
A successful Marketing department should be able to achieve these
objectives for the business:
o To increase sales revenue and profitability.
o To increase market share (percentage of sales held by one
brand or business) (quien domina?)
o To maintain or improve image of a product or company.
o To target a new market or market segment.
o To develop new products or improve existing ones.
(Market segment = part of the market that responds to certain
characteristics. Gives you an idea of what people like. E.g: Car You
have the family car, the luxury one and the secod car. There are
different profiles depending on the costumer)
SWOT ANALYSIS
This is a method to evaluate the statistics of a product of business. It
assesses these things:
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Strengths (internal)
Weaknesses (internal)
Opportunities (external)
Threats (external)

Strengths and weaknesses of a product are its internal factors and

relate to the actual position of the product, while opportunities and
threats are external factors and relate to the product futures
potential.
MARKET SEGMENTS: is where the market has been divided up into
groups of consumers who have similar need.
Market segments are parts of a market which contains people which
have similar preferences for their products. The Marketing
department should know which segment their product fits the most,
so that they can advertise and sell their products to it.
There are two ways to segment markets:
Based on the product:
- Mass market: Where there is a large number of sales of a
product. (e.g. Pepsi can be bought anywhere)
- Niche market: A small segment of a much large market for
specialized products. (e.g. Ferrari cars)
Regarding people buying the product:
Income
- Age
- Region
- Gender
- Use of product
- Lifestyle
Taking in account all this factors will influence the packaging and the
advertising methods and in which shops the product would be sold. It
is very important to target the right market segment since it can
increase sales by a lot. If a business can analyze all of these market
segments, they may find a market segment whose needs are not
being met. This is when the business finds a gap in the market, and it
could produce goods to take advantage of this gap and again increase
sales.
THE MARKETING MIX The marketing mix is a term that describes
all the activities which go into marketing a product. The producer
might need to find out through market research what customers want
from the product, and then they may change the product to produce
what customers want. Once this is achieved, the producer has to
convince the consumers that their product is the one that they want
and is better than those form the competition. They do this by
branding the product: giving it a name and packaging it. Then it is
advertised. The product also has to be sold in places that reinforce
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the brand image. All this is summarized in the four Ps:

Product: Design and quality, competitiveness, packaging, etc
o Market segment: each segment has the profile of the
consumer that you are trying to satisfy.
o Market research:
Secondary: Desk
Primary (field):
Questionnaire consumer panels sample (random
(everybody can be choosen: used for masive consume
product) quota (goes for specific characteristics))
Price: There are different pricing strategies. Businesses need to
use them so that they increase sales and cover costs.
Promotion: Advertising and promotion. Discounts, TV adverts,
sales, packaging, etc
Place: The location of the point of sale (the shop). Channels of
distribution. Type of shop (wholesalers or retailers or direct to
customers?)
A successful product requires effective use of the four P's. However,
businesses must be careful to not let each of these factors counteract
each other (e.g. expensive but low quality goods), else the product
will fail.
Unit 17
WHY IS MARKET RESEARCH NEEDED? Any business should find
out what people want to buy and how many people are going to buy
that product before producing a product since the chances of failing
are very high. Usually, market research tries to answer these
questions:
1 What feature of the product do they like/dislike?
1. Are people willing to buy the product?
2. What price are people prepared to pay?
3. Location of the selling point of the product.
4. Type of customer who buys the product.
5. Type of promotion that will be effective.
6. Competition in the same industry.
In resume, the aim of a market research is to find out what people lie
ia product/service.
Businesses need to know these things as well as consumer wants to
be more competitive. There are two main types of information that
can be gathered from market research:
Qualitative information: information where opinion or
judgment is necessary.
Quantitative information:i nformation about the quantity of
something.
There are two ways to gather any information for market

84

research:
Primary research or field research.
Secondary research or desk research.
PRIMARY RESEARCH is gathering original data which may require
direct contact with potential or existing customers. Also called field
research. There are several ways to do primary research:
- Questionnaires: set of questions to be answered as a means of
collecting data.
- Interviews
- Consumer panels: groups of people who agree to provide
information about specific product or general spending patterns
over a period of time.
- Observation:
- Experiments
Note: Questionnaires, interviews and consumer panels are all
types of surveys.
THE PROCESS OF PRIMARY RESEARCH
1 Identify the purpose of the market research.
1. Decide on the best method of research. (primary, secondary or
both)
2. Decide on the size and type of sample (group of people who will
be asked)
3. Carry out the research.
4. Collate data and analyze results.
5. Produce a report (may include recommendations of action paths
to take)
METHODS OF PRIMARY RESEARCH
Questionnaires: involve asking people questions. Deciding
what questions to ask since sometimes questions may mislead
people and make them answer what they don't really think.
Advantages:
Detailed qualitative information can be gathered.
Customers' opinions can be gathered.
Disadvantages:
If the questions are not well thought, the answers will not be
very accurate.
Takes time and money to collate and analyze the results.
Interviews: Interviews are face-to-face conversations with
customers where the interviewer has a set of prepared
questions.
Advantages:
The interviewer can explain any questions the interviewee does
not understand.
Detailed information about customers' opinions.

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 Disadvantages:
Interviewer bias. The interviewer might unconsciously lead the
interviewee to answer in a certain way.
Time consuming and expensive.
Interviews can be carried with one person or they can be done
in groups where there is a single interviewer putting the
questions to a group of people. This is less expensive but some
people may be influenced by other opinions or they may be in
silenced because of shyness.
When deciding who to ask to fill in the questionnarie or who to
interview , a sample whould have to be selected as it would bee
too expensive and impractical to try to include all the relevant
population.
SAMPLES: A group of people who are chosen to do market
research on. There could be:
o Random sample: When people are sleected at random as a
source of information for market research. Every member of
population has an even chance of being selected.
o Quota sample: People are selected on the basis of certain
characteristics (eg: age, gender, income) as a source of
information for market research. By this way, the
researchers can find out the views of specific groups.
Consumer panels: Are groups of people who agree to provide
information about a specific product or general spending
patterns over a period of time. They may even test it and give
feedback on likes and dislikes.
Advantages:
They provide detailed information about a product.
Disadvantages:
They can be time consuming, expensive, and biased if opinions
of some is influenced by others.

Observation: It involves:
Recording: e.g. meters can be fitted to a monitor to see what
people are watching.
Watching: e.g. see how many people go into a shop and
actually buy something.
Audits: e.g. counting inventory to see what has sold well.
(inspecting)
Advantages:
It is inexpensive.d
Disadvantages:
Only provide basic figures and not reasons why people do
things.
Experiments: involves giving products to consumers to see
what they think about it.

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 Advantages:
Easy to set up, carry out, and gather consumer opinions.
Disadvantages:
People might give wrong feelings to avoid offence.
Representatives of samples may not be asked, just people who
shop in an area.
Many potential customers may not be asked.
SECONDARY RESEARCH: Is the use of information that has already
been collected and is aveilable for use by others. Also called: desk
research.
INTERNAL SOURCES OF INFORMATION
Data collected from past researches could easily be used again if it is
needed. Examples of internal sources of information include:
- Sales department: sales records, pricing data, customer
records, sales records.
- Distribution and public relations personnel.
- Finance department.
- Customer service department.
EXTERNAL SOURCES OF INFORMATION
Data collected from sources outside the business. The data may still
be useful but there are many limitations since it has been gathered
for other purposes. Sources include:
- Internet: gives all sorts of information, but the info must be
validated.
- Trade and employer associations: gives info about things in an
industry.
- Specialist journals.
- Research reports.
- Newspapers: about the economy and disposable income of
workers.
- Government reports and statistics: contains things such as age
groups and culture.
- Media reports.
- Market research agencies' reports: detailed reports on the
economy. Expensive to buy.
Secondary research is often a much cheaper way of obtaining
information. It also gains access to data which cannot be gathered by
primary research such as government issues or the economy.
WHO CARRIES OUT MARKET RESEARCH?
Normally, research is done by any business that needs it. In smaller
businesses, owners use secondary research since they cannot afford
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to conduct primary research. However, if a business has enough

money, it can afford to have a specialist market research agency to
do the research for it.
ACCURACY OF MARKET RESEARCH INFORMATION
The accuracy of market research depends on how the research was
conducted and how carefully samples have been selected. Here are
some ways to make information from market research more
accurate:
A sample needs to be truly representative of the total
population, hence a quota sample is normally used.
The larger the sample, the more accurate the results.
Questionnaires need to be tested on a small group of people to
see if there are misinterpretations. The questionnaires will be
modified to be as clear as possible. They should be phrased to
ensure honest responses.
Concerning secondary research, there are a few problems with it:
Data collected by others may not be accurate since it was used
for other purposes.
Data can be out of date.
It may be biased and some information is left out.
All in all, it must never be assumed that information collected from
market research is completely correct.
How to design and use a questionnaire
Firstly, you need to ask yourself some questions:
What do I need to find out?
Who do I need to ask?
Where will I carry out my questionnaire?
Writing the questions
Ask no more tha 12 questions. (impatience)
Make the questions simple. The answers should be simple enough to
collate. (e.g. Yes/No answers)
Use choice of age groups.
Avoid open-ended questions.
Avoid misleading the interviewee with questions. (don't want to cause
offence)
The order of the questions should be logical.

Unit 18
REMEMBER:
Tittle
Keys
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Labeled axes
Only use a pie chart when the total is 100%
Unit 19
THE ROLE OF PRODUCT IN THE MARKETING MIX
The product itself is the most important element in the marketing
mix. Without it, the other three wouldn't exist. Most companies today
are market oriented, and will identify a suitable product for the
market before moving on to determine the other 3 elements. Large
companies have R&Ddepartments which spends all its time
developing new product and analyzing the pros and cons of
competitors' products.
TYPES OF PRODUCTS:
Consumer goods: Goods that are consumed by people. (e.g.
food, cake)
Consumer services: Services that are produced for people. (e.g.
education)
Producer goods: Goods produced for businesses. They are
bought to help with the production process (e.g. machinery)
Producer services: Services to help other businesses. (e.g.
accounting, insurance)
Each type of product determines the price, promotion and place to
sell the product. Producing the right product at the right price is an
important part of the marketing mix.
What makes a product successful?
- Products need to satisfy consumer wants/needs to be
successful.
- The product must be at the right quality so that customers are
willing to pay for it.
- Costs should be low enough to make a profit. Not too expensive
to produce (relative to the price that could be charged)
- Design of a product is important. This means that its quality
and durability should meet expectations and match the price of
the product. The design should also enhance the products
brand image. Performance, reliability and quality should be
consistent with the products brand image
- The first business to produce the new product or introduce new
change to the original product before its competitors.
- Products can stimulate new wants from the customers.
- Has something very distinctive that makes it appear different.

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PRODUCT DEVELOPMENT
Most businesses use a general process to develop any product:
1. Generate ideas: Ideas can be generated by:
Employees.
Customers.
Competitor's products.
R&D department.
Sales department.
1 Select the best ideas for further research: The best ideas are
selected and further research is done to see their pros and
cons.
2. Decide if the company will be able to sell enough for the
product to be a success: To see whether there will be enough
sales of the product to break-even (development costs
included). How large they think the sales would be and the
likely size of the market share. Break-even analysis.
3. Develop a prototype: Allows the Production department to see
how a product could be manufactured and identify its problems.
4. Launch the product in one part of the country to test the
market: The product is launched on to one small part of the
market. To see if the product can sell or not.
5. Full launch of the product to the whole market.
THE IMPORTANCE OF BRANDING
Traditionally, a product's unique features and quality were explained
by the sellers who made the product. However, since products are
usually sold in private retail shops nowadays, these points need to be
projected differently. Products therefore need to be branded with an
unique brand name and the products features and quality will be
projected with advertisement. The prices of branded goods are
usually higher, since customers are more confident to buy them.
Businesses use brands for their products to encourage consumers to
keep buying their products and not those of their competitors.
The brand name is the unique name of a product that distinguishes
it from other brands.
Brand loyalty is when consumers keep buying the same brand again
and again instead of choosing a competitors brand.
Brand image is an image or identity given to a product which gives
it a personality of its own and distinguishes it from its competitors
brands.
Here are things that are involved with branding:
Unique name (brand name)
Unique packaging.
Needs advertising to enforce the brand's qualities.
Higher price than unbranded products.
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Higher quality than unbranded products.

Creates a brand image (unique image associated with using the
product)
Creates brand loyalty.
Consistent quality.
PACKAGING is the physical container or wrapping for a product. It is
also used for promotion and selling appeal.
Getting the packaging right is very important. Packaging has
functions to perform:
Protecting the product (also includes preserving foods)
Making it easy to transport.
Allow the product to be used easily. Container must be able to
be opened easily. (e.g. juice in a can)
Suitable for the product to fit in.
Carries information about the product.
Packaging also helps promote the product:
Make it eye-catching.
Promotes the brand image.
THE PRODUCT LIFE CYCLE
Product life cycles show the stages that a product goes through from
its introduction, to its growth, and then to its decline.
1 Development: The product is under development.
Introduction:
- The product is introduced.
- Sales grow slowly
- Informative advertising start to attract customers
- Price skimming could be used if the product is new to the
market.
- The
main
aim of
sales is
to
breakeven.
- No
profit
1 Growth:
- Prices rise rapidly.
- Persuasive advertising is used to encourage brand loyalty.
- Prices may be reduced a little.
- Sales start to generate profits since costs have been covered.
Profits.
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If it keeps growing is because is established.

Maturity:
Sales rise more slowly.
Competition forces prices to be lowered and the firm uses
competitive pricing.
- Advertising is used to maintain sales.
- Profits are at their highest.
1 Saturation:
- Sales reach their imit.
- There are no new competitors.
- Sales and advertising becomes stable
- Profits fall because of lowered prices to be competitive.
1 Decline:
- Product goes out of fashion
- Sales and profits decline.
- Advertising eventually stops.
- It is no longer profitable to produce the product.
1
-

The length of each stage varies with products. The business needs to
identify which stage their products are in so that they can use a
suitable marketing strategy for it.
EXTENDING THE PRODUCT LIFE CYCLE
When a product has reached its maturity or saturation stage a
business may adopt extension strategies to stop sales from falling
which extends the product life cycle. Sales are given a boost by these
strategies.
o Introducing new variations of the product.
Sell into new markets.
Make small changes to the products design and packaging.
Sell through additional, different retail outlets.
Update the product (make it better)
Use a new advertising campaign.
Extension strategies aim to prolong the maturity stage of a product.
Successful extension strategies may result in something like this:

Nevertheless,

it must be noted that businesses

92

manufacture more than one product. They should have a product in

growth stage to counteract an older one which is declining.
Unit 20
THE MARKETING MIX: PRICE

Price Cost = Making

THE ROLE OF PRICE IN THE MARKETING MIX

When pricing a product, a business needs to choose one that fits with
the rest of the elements in the marketing mix. E.g. high price so that
consumers thinks they are buying high quality goods, low price for
low quality goods, or competitive prices in a market with a lot of
competition.
PRICE DETERMINATION IN A FREE MARKET
Prices are driven by market forces called demand and supply. This will
mean that businesses have to charge the market price for their
producers and not necessarily what they want to charge.
To understand how price is arrived at, demand and supply will be
looked at separately.

Demand: Is not only that people want to buy a product, but

that they are able to purchase it. Prices can affect how much
demand there is for a product. Normally, if the price goes
up,demand goes down, and vice versa.
Supply: Also varies with price. However, it is different. If the
price goes up, then the owners would want to be supplied with
more products to take advantage of the high price, thus the
supply goes up (and vice versa).

THE MARKET PRICE

For the market price to be determined, demand and supply must all
be put onto the same graph. The place where the two lines (called
curves) cross is called the equilibrium, where the same number of
goods are demanded and in supply resulting in no leftovers. All the
products are demanded and all of them are sold.
FACTORS THAT AFFECT DEMAND AND SUPPLY
- The popularity of substitute products (products that can be
used instead of the product)
- The popularity of complementary products (products that
require each other or are used together)
- Changes in income.
- Changes in taste and fashion.
- Changes in advertising.
FACTORS AFFECTING SUPPLY
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Costs in supplying goods to the market:

Price of raw materials.
Wage rates.
Improvements in technology: Makes it cheaper to produce
goods.
Taxes and subsidies: Higher taxes mean higher costs.
Climate (for agricultural products): Supply of crops depends on
weather.
PRICING METHODS If a product is easily recognizable from other
products, it would probably have a brand name. And if it has one, it
would need a suitable pricing strategy to complement the brand name
that should improve its brand image. Here are the strategies that are
used:
Cost-plus pricing: Is the cost of manufacturing the product
plus a profit mark up (%). I mean, cost of production + mark
up (%) = price.
Easyto apply.
You lose sales if your price is higher than your competitors
price.
Break-even analysis: Uses the break-event chart.
It assumes that everything is selled

Market pricing: To avoid competition.

Discrimination pricing: E.G: family ticket, female, etc.

Psychological pricing: Is when particular attention is paid to

the effect that the price of a product will have upon consumers'
perceptions of the product. This may be by:
- Using high price to make using the product give the user a
status symbol.
- Pricing a product at just below a whole number (e.g. $99)
which gives it an impression that it is cheaper.
- Supermarkets charge low prices for products that are bought on
a daily basis to give consumers an impression that they are
being given good value for money.
Competitive pricing: Competitive pricing means setting your
price to a similar or lower level than your competitors prices.
Sales will be high because your price is at a realistic level (not
under/over-priced).
You have to research on your competitors prices which cost
time and money.
Promotional pricing (Similar to penetration): Promotional
pricing means that you lower the prices of goods for a short
time.
Help get rid of unwanted stock.
Can renew interest in a product if sales are failing.

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 Sales revenue will be lower.

STRATEGIES:
High price:
- Price skimming: Is where a high price is set for a new product
on the market. High prices are used when a new product is
introduced into a market, partly because it has a novelty factor,
and because of the high development costs. High prices could
be charged because a product is high quality. One last use of it
is to improve the brand image of a product, since people
usually associate high price with good products.
This is related with the status symbol appeal. High prices are
going to be used for a unique product which is associated with a
particular group.
Skimming can help establish a product as being good quality.
It may lose potential customers because of high price.
- Maximizing: Used when the product enters the market. People
want a lot the product because its new. Has to do with fashion.
You try to maximize your profit when you know everyone is
going to want it. As soon as the initial rush passes, prices get
slow.
Low price:
- Penetration pricing: Is used to enter a new market. It should
be lower than competitors' prices so that you get people to try
your product.
Is similar to promotian prices. You penetrate in the
market by using promotion as the method.
Ensures that sales are made and the new product enters the
market.
Prices will be low Sales revenue will bellow.
-

Capturing: First you capture the costumers, and then you

charge them more. E.g.: Playstation with the games. Printers
with the tint.
Unit 21

THE ROLE OF PROMOTION IN THE MARKETING MIX

Promotion informs consumers about the rest of the marketing mix.
Without it, consumers do not know about the product, the price, or
the place. Promotion is more than just advertising, and it includes
several activities. It is crucial when you are selling in a mass market
or you have a brand name. Promotion includes:
Advertisements: They can take different forms, e.g. on TV, in
newspapers.
Avertising publicity: Publicity is for free while advertising is
paid for.
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Promotion: e.g. Money off coupons.

Personal selling: Sending out sales representatives to talk
directly to the consumers.
Public relations: Involves making the public aware of the
company, e.g. creating publicity in the media.
Packaging
Branding
The aims of promotion
To inform people about particular issues (often used by the
government)
To introduce new products to the market.
To compete with competitors products.
To improve the company/brand image.
To increase sales.

ADVERTISING
The advertising process
1 Set objectives: A business needs to determine the purpose of
advertising.
Decide the advertising budget: Set a limit on how much the
business can spend on advertising. It can be decided based on:
A percentage of predicted sales revenue.

How much competitors are spending.

How much the business can afford.

1 Create an advertising campaign: Decide on what advertising

campaign to run. Can be determined based on:
Target audience.

Objectives.

1 Select the media: Using the suitable media for advertising that
is the most cost effective. E.g. TV, newspaper. Determined by
the target audience and the budget. The business will also
decide how often the adverts will appear. Exaples of media:
Evaluate the effectiveness of the campaign: Has the advertising
met objectives? See if sales have increased or if the products
brand image has improved.
Different types of advertising
Informative advertising: The emphasis of advertising is to give
full information about the product. (e.g. computer)
Persuasive advertising: Involves persuading consumers that
96

theyneed the product and should buy it. (e.g. perfume)

Different media of advertising
Television
Adv: Millions of people will see it As it has colour and
sound, the product can be presented in a very attractive
way. - Easy to reach target audiences.
Dis: Expensive: money is going to be a limitation - if you
want a particualr group you wont use the tv.
Examples: Food Cars - Household tools

Posters/billboards: Persuasive advertising no facts.

Adv: Permanent cheap Potetially seen by anyone who

passes by them.
Dis: Can easily be missed no detailed information can be
included
E.G: Products bought by a large section of the population
events.
Radio:
Adv: Uses song or tune which makes ads memorable
cheaper than TV
Dis: Cannot use visual message - Expensive compared to
others - The advert has to be remembered - Not as wide
audience as TV
E.G: Local services Shops.

Bags
Adv: Can reach many people - Cheap for local newspapers A lot of info can be put into the ad - Adverts are permanent*
Dis: Not eye-catching if they are in black and white - Does
not grab readers attention.
E.G: Local products Cars - Banks

Leaflets
Adv: Cheap - Given to a wide range of people. - Delivered to
peoples houses. - May contain vouchers to encourage
readers to keep the advert. - Permanent*
Dis: May not be read
E.G: Local events - Retail stores like Seven-Eleven

Cinemas:
Adv: Visual image shows product in a positive way - Fairly
cheap - Effective if target audience goes to see particular
films.
Dis: Only seen by people who go to watch films.
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 E.G: Toys for a childrens film.

Magazines:
Adv: Can use specialist magazines to reach only target
audience - Magazine ads are in color and are more
attractive. - adverts can be cut down and kept. - more
information can be put on here than in a tv or in the radio.
Dis:They are only published once per month/week - More
expensive than newspapers. - less attention grabging
E.G: Perfume - Golf equipment - Fashion clothes

Newspaper: They can be national or local. The national is much

more expensive but the cost of advert per reader is often lower
for national newspaper than for local newspaper. The national
newspaper is purchased by more people. Also, particular
national newspapers are usually read by certain social groups
and if these people are the potential custumers, this may be a
very cost effective way to reach them. If the business is small
and is selling only to the local population , an advert In the
local newspaper will be cheaper and more cost effective than
one in a national newspaper because it needs to be read only
by locals.
Adv: you can cut it down. - more information can be put on
here than in a tv or in the radio
Dis: Low movement. - less attention grabbing.

Internet (e-commerce):

Adv: Can be seen by anybody around the world. - Can store

lots of info. - Orders can instantly be made.
Dis: Internet searches may not highlight the website and it
could be missed. - Internet access is limited in some
countries. - Competition from other websites. - Security
issues may discourage people from buying online.
E.G: Virtual goods - Services such as banking or insurance.
- Virtually anything that is not too small.
Others (Delivery vehicles or sides of bags)
Adv: Cheap
Dis: May not be seen by everyone

E.G: Shops put their names on plastic bags - Coca cola use
neon signs.
**Permanent: Adverts can be kept for future references.
Design of adverts
Businesses usually use the AIDA model:
Awareness:Informs consumers that the product exists
everything which calls people attention.
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Interest: Consumers need to become interested in the product.

Desire: Makes consumers want the product.
Action: Prompts consumers into buying the product. Eg: of
direction.
The AIDA model is most effective on products that are not used
regularly. It is less effective on products that are bought on a daily
basis because people will know how good the quality really is.

PROMOTION
Different types of promotion
Promotion is usually used to support advertising and to encourage
new or existing customers to buy the product. Its main function is to
boost sales in the short-term, but not in the long term. It is used to
attract new customers so that they can try out items with the hope
that they will like it and continue to buy it after the promotion has
ended. Here are some ways in which promotion is used:
- Price reductions: Involves reduced prices and money-off
coupons.
o 2x1
- Gifts: Gifts are placed in the packaging of the product to
encourage consumers to buy it. (E.g. toys in McDonald's happy
meal). Sometimes the product comes with some coupons that
the customer has to collect and then change it to get a gift. The
aim is that the costumer may continue buying the product
during and after the promotion.
- Competitions: A card may be put in the packaging allowing the
consumer to enter contests such as the lottery.
- Point-of sale displays and demonstrations: Can be put near the
window and displayed attractively. It could also encourage
people to buy it if they can see how it works (demonstrated by
sales staff)
- After sales service: e.g. warranty services. It reassures the
customers that if the product has a problem then they can go
and fix it for free. This makes the product more attractive than
others without warranty.
- Free samples: Encourages people to try the product and then
buy it. It can be included in other products as well. E.g.
washing machine comes with free washing powder.
- Brandings: Helps to make a difference.
- Sponsorships
The advantages of promotion
Can promote sales during the year when sales are traditionally
low (encourage off-season purchases)
Encourages new customers to try an existing product.
Encourages costumers to try a new product.
Encourages people to buy a product more often or the product
in greater quantities.
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Encourages people to buy a product instead of competitors'

products.

Which type of promotion should be used?

When deciding on what type of promotion should be used, these
points should be considered:
o The stage of the product life cycle: e.g. use informative
advertisement in the introduction stage of the life cycle and
persuasive advertisement if the product is at maturity.
o The nature of the product itself: e.g. consumer goods use
coupons but producer goods use discounts on bulk buying.
o The advertising budget: the type, place and frequency of
promotion depend on how much you can spend.
o The cultural issues involved in international marketing:
businesses need to consider whether their type of advertising
might offend the local people. They should also take into
account things such as how many people own TV, literacy level,
etc
o The nature of the target market: Different markets require
different media for advertising.
Personal selling

Used when the nature of the product varies. e.g. housing

Price varies.
Quality varies.
Customer requirements vary.
When customers need advice on what type of product is the
most appropriate for their situation.
When selling expensive products such as cars.
When negotiation about price or products is needed. This is
common for businesses that sell to other businesses. (e.g.
discounts on bulk buying)
When a business has a stand at a trade fair.

Public relations
o Good for improving the brand/company's image.
o These activities raise public awareness of the company.
o Includes:
- Sponsoring events such as football matches.
- Giving products to charity.
- Employees take part in an activity for a good cause.
- Donating a percentage of products.
Customer service
Customer service is used to retain existing customers (which is
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cheaper than attracting new customers)

Good customer service is not only producing a good product but also
means:
Giving advice about the product: It is always good to give as
much information about a product as possible so that the
customers can be sure that they have purchased the product
that meets their requirements.
Delivering goods for customers: It becomes convenient for the
customer which encourages the customer to buy products from
the business since they do not have to go anywhere.
Providing credit facilities: This means letting customers pay
later or in monthly installments. This make products look
cheaper and more affordable encouraging customers to buy
them. Credit facilities are usually offered when people buy
expensive products. You usually get interest as a result, but you
could charge no interest for promotional purposes.
Providing product information: This means giving information
on how to use the product and offering help on customer
service helplines.
After-sales service: The aim is to show that you care about
customers' satisfaction. Examples of after-sales service include:
- Warranties.
- Regular product checks.
- Giving refunds for faulty products.
- Exchanging unsatisfactory goods.
Unit 22
THE ROLE OF PLACE IN THE MARKETING MIX
After the product, price, and promotion has been decided, the
product/service has to be available to the consumer where and when
they want to buy. Consumers should be able to get to the product
easily, and the product has to be in the right place (e.g. expensive
chocolate shouldn't be in a small grocery store) to sell well.
CHANNELS OF DISTRIBUTION
Businesses need to know how to get the product to the consumer.
A channel of distribution is the means by which a product is passed
from the place of production to the customer or retailer.
Different channels:
Channel 1: The manufacturer sells directly to the customer. E.g.
agricultural goods are sold straight from the farm. Products can
be sold by mail or via internet and sent by post (not cost
effective).
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 Channel 2: Involves selling to retailers which sell to customers.

Common when the retailer is large or the product is expensive.
Channel 3: Involves the product going through wholesalers.
Wholesalers break bulk so that retailers can buy them in
smaller quantities. This is common for perishable items such as
foods.
Channel 4: Involves selling the product overseas through an
agent, who sells them to wholesalers on behalf of the company.
This may be because he/she has better knowledge of the local
conditions.

METHODS OF DISTRIBUTION
Methods of distribution for different channels of distribution can
include:
Department stores: A large store, usually in the centre of town
that sells a wide range of goods from many producers.
Chain stores: Two or more stores which have the same
name/characteristics.
Discount stores: Offers a wide range of products, including
branded products, at discount prices. Often all the products are
similar.
Superstores: Very large out-of-town stores that sell a wide
range of products.
Supermarkets: Retail grocery stores with dairy produce, fresh
meat, packaged food and non-food departments.
Direct sales: Goods are sold directly to the consumer (first
channel of distribution).
Mail order: Customers order via the post by looking at the
catalogue.
Internet/e-commerce: Customers order via the internet by
looking at the website.
E-commerce: Use of the internet and electronic communications to
carry out business transactions.
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ADVANTAGES AND DISADVANTAGES OF A WHOLESALER

Advantages:
Breaks bulk: they buy in large quantities from the manufacturer
and sells to the retailer in small quantities.
Reduces storage costs for retailers and producers.
Fewer transactions are needed for the producers its cheaper.
Fewer deliveries and less administration.
Gives credit to small retailers.
May deliver to small retailers reducing their transport costs.
Promotion carried out by wholesaler instead of producer.
They give advice to retailers/producers on what is selling well.

Disadvantages:
More expensive for small retailers to buy from a wholesaler.
May not have the full range of products to sell.
Takes longer for perishable products to reach the retailer so
quality decreases.
Wholesaler may be far from small shops.
SELECTING THE CHANNEL OF DISTRIBUTION TO USE
When selecting the channel of distribution to use producers need to
consider a few things:
- What type of product is it? Is it sold to other producers or to
customers?
- Is the product very technical? Will you need to explain how to
use the product? If yes, Channel 1 should be selected (e.g.
airplanes)
- How often is the product purchased? If it is bought every day, it
should be available in many retail outlets, otherwise people
might not bother to buy it at all.
- How expensive is the product? If it is expensive and has an
image of being expensive, then it will be sold in a limited
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number of retail outlets.

How perishable is it? If it is very perishable, it should reach the
customers quickly or be available in many outlets so it can be
sold quickly.
Location of customers? Channel 4 might be used for customers
overseas. E-commerce would be viable anywhere apart from
the countryside.
Where do competitors sell their products? Usually producers will
sell their product in retail stores where their competitors sell
too so that they can compete directly for consumers.

METHODS FOR TRANSPORTING GOODS

This is what kind of vehicles is used to transport the products. They
should be fast enough for the product to reach its destination in time.
However, they must also be cost efficient and safe. These factors a
taken into account when deciding which method of transportation is
used.
Several forms of transport used to distribute products:
Road haulage (Lorries and vans):
Cheap and fast.
Require no rail links.
Can advertise on side of lorries.
Not cost effective if lorries are not used often (loan, lease and
insurance) may need to hire a specialist transport business
instead.
Railways:

Even cheaper and faster than road haulage.

Useful for long distances.

Goods need to be transported to retail stores by road haulage

at the end of the destination.
Canal and river:

Slow but cheap.

Good for products far too big/heavy to be transported by

road/train.
Need canals and rivers.
Sea freight:

Used mainly for international trade.

Can carry a lot of products.

Products are stored in containers, which can be easily loaded on

to lorries. Makes it cheap to load and unload the ships.
Air freight:

Extremely fast but expensive.

Used for small, expensive, or perishable products.

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 Pipelines:

Used to transport liquids or gases over long distances.

Cheaper than using road haulage for liquids. Roads are not
always available.

DRAWING UP A MARKETING PLAN

Finally, after all the four P's of the marketing mix have been decided,
the Marketing department will put them together into one marketing
plan. It will also consider how the 4 P's will be modified or adapted to
fit the overall image of the product. If this is successful, sales and
profits will be likely to increase.
Fijarme el case study de la 322.

Product: Describing the product and the people to who is

directed.
Price: you have to have an idea od the source od product and
consumers you have and so you have to be constisted. You can
not talk about an exclusive product and say that you are going
to advertise it in a bad place.
Promotion: strategy and why.
Place.
Unit 23

WHAT IS MEANT BY PRODUCTION?

Production is the provision of a product to satisfy wants and needs.
The process involves businesses adding value to their products. E.g.
The production process of matches involves cutting wood into
matchsticks, putting phosphorus ends on them and packaging them
to sell.
PRODUCTIVITY the outputs measured against the inputs used to
create it. This is measured by:
Output (over a given period of time) / Number of employees.
As employees become more efficient, the amount of output produced
per employee will rise and therefore the costs of producing the
product will fall. Firms aim to be productively efficient to be able to
make more profits and compete against their competitors.
METHODS OF PRODUCTION
Job production
Batch production
Flow production
JOB PRODUCTION where a single product is made at a time.
Products are made specifically to order, for example, a customer
would order a particular dish and Tara would make it. Other examples
include: specialist machinery manufacturers who will manufacture a
machine for another business to meet a particular specification,
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individual computer programs, ships, etc.

o A single product is made at a time.
Goods are usually specialized; no two goods are the same. Each
order is different.
Usually made to order.
Advantages:
The product meets exact requirements of the customer.
The workers have more varied jobs.
More job satisfaction for workers.
Disadvantages:
Skilled labour is needed.
Slower and more expensive than other methods of production.
Usually labour intensive.

BATCH PRODUCTION where a quantity of a product is made at one

time , then a quantity of another item will be produced
A quantity of one product is made, and then a quantity of another
item will be produced, usually as orders come in. Similar products are
made in blocks or batches.
Advantages:
It is flexible. You can easily change from making one product to
another.
Still gives some variety to workers jobs.
Production is not too affected by machinery breakdown.
Disadvantages:
Expensive to move products around the workplace.
Storage space will be needed to store raw materials. Expensive.
FLOW PRODUCTION: Where large quantities of a product are
produced in a continuos process. Sometimes referred to as mass
production.
o Uses specialization.
o Benefits from economies of scale.
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o Is capital intensive.
Advantages:
Cheaper. Low costs. Low prices. High sales.
Increased efficiency.
Little training is needed.
Goods are produced quickly and cheaply.
Goods do not need to be moved around like batch production.
Saves time.
Quality is high and standardized
Disadvantages:
Boring for the workers. Little job satisfaction.
Needs a lot of capital to set up.
If one machine breaks down then the whole production process
stops.
Which type of production should be used?
The type of production that should be used varies with the demand:
Job production: Unique and individual service is required.
Batch production: Demand is higher but products will not be
sold in large quantities. Batches are made to orders.
Flow production: Demand for the product is high and steady.
STOCK CONTROL
Stock control is important so that a business will not run out of stock
and be unable to satisfy demands. When stock levels get to a certain
point (reorder point), more goods need to be reordered for the stock
level to reach its maximum again. If more goods are not reordered,
stocks could run out because of an unexpected surge in demand.
However, keeping a lot of stock costs money, so the level of stock in a
company should always be balanced.
In the other hand, stock has to be control since it can be broken, or
stollen. In addition, knowing the quantity permits you know how
much you have to sell. In the other hand, if you run out of stock in a
complicate situation it means that you are giving an opportunity to
your costumers to get to know the competition.
As a concequence, in a business, tock must be aveilable with
sufficient lead time to meet the needs of the production department.
This is particulary in batch or flow production where the production
must be stopped if there are not raw materials at hand.
Lead time is the margin of time between the date when stock is
obtained and the date when it is sold on
There are two ways of controlling the stock:
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JUST IN CASE - JUST IN TIME

Just in case:
Lead time: You are receiving stock. Time you recorder
Minimum level: Minimum stock available. Stock you have just in
case = butter stock.
You have to know the amount of units you need.

Just in time:
No stock avoiding (you reduce the space needed) some costs
(same fix costs and no costs of insurance)
Important a trust worded supplier stable demand.
Eliminate the waste no butter stock
You reduce cost no insuring.

LEAN PRODUCTION techniques used by business to cut down on

any waste and therefore increase efficiency, for example, by reducing
the time it takes for the product to be developed and become
aveilable for sale.
o It tries to reduce the time taken to produce a product and
transport it to the selling point.
Includes the following methods:

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Kaizen.
JIT production.
Cell production.
Kanban.

KAIZEN
Continuous improvement through the elimination of waste.
Ideas of workers
Regular meetings of workers to discuss how to increase
efficiency.
Advantages:
Increased productivity.
Reduced amount of space needed for the production process.
Work-in-progress is reduced.
Improved layout of the factory floor may combine jobs of some
employees, freeing others to do other things.
JUST IN TIME PRODUCTION
o Eliminating the need to hold stocks of raw materials or
unsold
stocks of the finished product.
o Goods are delivered to the selling point just when they
are needed.
o Warehouse space is not needed and no extra stock is
ordered.
o JIT production needs:
** Reliable suppliers.
** Efficient system of ordering raw
materials.
CELL PRODUCTION
Production line is divided into separate, self-contained units
called cells.
Each cell makes an identifiable part of the finished product.
Improves the morale of the employees and makes them work
harder so they become more efficient. The employees feel more
valued.
KANBAN
A system of ordering used with JIT production.
Operates with two component bins: one on the production line
and one being made ready. When the first is empty it is
wheeled to the section of the factory that produces those
components. This triggers the production of the components
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which should be ready before the second component bin is

empty.
Reduces the amount of part-finished stock and means that
everyone has to work together and efficiently.
IMPROVEMENTS IN TECHNOLOGY
In the production process:
Automation: Equipment in the production process is controlled
by a computer. Only few people needed to supervise.
Mechanization: Tasks are done by machines operated by
people. They are quick, accurate and work non-stop 24 hours a
day.
CAD (computer aided design): Used for designing 3-D objects.
Used to design new products or to restyle existing products.
CAM (computer aided manufacture): Computers control
machines in the production process.
CIM (computer integrated manufacture): CAD and CAM are
used together. The computer that uses CAD is directly linked
with the one that controls the production process.
In shops:
EPOS (electronic point of sale): When products' bar codes are
scanned and the information is printed out on a receipt. Data is
also sent to a computer to keep track of stocks.
EFTPOS (electronic fund transfer at point of sale): When the
cash register is connected to the retailer's main computer and
banks. The customer's credit/debit card is swiped and the
money is debited from the customer's bank account. A receipt
is printed out to confirm the transaction.
The advantages of new technology
Increased productivity.
Boring jobs done by machines. Boosts motivation.
Training is needed to operate new machines. Workers become
more skilled.
Better quality.
Better stock control.
Quicker communication and reduced paperwork.
Info is available faster, resulting in faster decision making (for
managers).
New products are introduced as new methods of production are
introduced.
The disadvantages of new technology
Unemployment
Expensive
- To invest in new technology.
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- To replace outdated technology.

Employees are unhappy with changes in the workplace.

QUALITY CONTROL AND QUALITY ASSURANCE

There are three ways to control quality:
QUALITY CONTROL: You are making sure that everything respond to
the standard stablish
Take samples at regular intervals to check for errors A whole
batch or production might have to be scrapped or reworked.
Check that quality was being maintained during the production
of goods
Try to eliminate errors before they occurred
Find any defective products before they went out of the factory.
Wastes a lot of money.
QUALITY ASSURANCE
Involves inspecting during and at the end of production.
Aim to
- Make costumer satisfied increase added value, increase sales
and increase profits.
- Stop faults from happening: attention to the design of the
product, the components and materials used, delivery
schedules, after-sales service and quality control procedures.
- Set a quality standard that all products have to achieve.
Need team working and responsibility.
E.G: giving garanty
TOTAL QUALITY MANAGEMENT
Continuous improvement of products and processes by focusing
on quality at each stage of production.
Customer needs to be always satisfied encourages everyone
to concentrate on quality.
Quality is the main aim for all staff and no faults should occur.
Quality circles.
WAYS TO INCREASE PRODUCTIVITY
Improved quality control/assurance reduces waste.
Improve employee motivation.
Introduce more modern equipment.
Improve stock control.
Train staff to be more efficient.
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Use machines instead of people to do jobs

Unit 24
LOCATION OF INDUSTRY
The location of a business is considered when it starts-up or when its
present location is unsatisfactory. The business's objectives as well as
the conditions of the environment change, so the business may need
to look for a new location once in a while.
FACTORS AFFECTING THE LOCATION OF A MANUFACTURING
BUSINESS
Production methods and location decisions
Small scale (job production) transport and location of
suppliers is less important.
Large scale (flow production) transport and location of
suppliers are more important.
Market
The product gained weight and its heavier than the
components Need to be near to cut transportation expenses.
Need to be near to transport fresh goods.
Raw materials/components
Components may be heavier or more expensive to transport
than the product Need to be near to cut transportation
expenses.
Need to be near to transport perishable goods.
External economies of scale
How good near by businesses are
- Support services: for maintenance of equipment.
- For training workers
- Local education establishments: research departments.
Availability of labour
Skills required
How skilled they are.
Government influence
Grants/subsidies.
Regulations and restrictions
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Transport and communication: To be able to transport product

easily. Be near a transport system.
Power: Need a reliable source of power to operate effectively.
Water supply

A lot of water is needed in the production process (e.g. cooling,

cleaning)
Cost of water.
Reliable supply.

Personal preferences of the owners May locate in areas that:

- They come from.
- They like.
- Pleasant weather, etc
Climate
E.g. to reduce heating costs in a warmer climate.
Some climates are required to produce certain items.
FACTORS AFFECTING THE LOCATION OF A RETAILING
BUSINESS
Shoppers

Do shoppers go there?
What kind of shoppers go there?

Nearby shops
Visited shops.
Competitors.
Mass market.
Gap in the market.
Customer parking available/nearby: Convenience for the
customer.
Availability of suitable vacant premises: Goods sites (e.g. in
shopping centres) are in short supply. A suitable vacant shop needs
to be available.
Rent/taxes: The more popular the site, the higher the rent and
taxes.
Access for delivery vehicles: For delivering goods.
Security: If the area is insecure:
- Goods will be stolen.
- Insurance will be reluctant to insure the shop.
Legislation: Laws restricting the trade of goods in certain areas.
FACTORS THAT INFLUENCE A BUSINESS TO RELOCATE EITHER
AT HOME OR ABROAD
The present site is not large enough for expansion: If a
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business simply prefers to expand elsewhere, the factors

affecting location will have to be considered.
Raw materials run out:
- One alternative is to import raw materials from elsewhere or
move to a new site.
- Important for mining industries.
Difficulties with the labour force:

Wages are too high.

Need skilled labour.
Rents/taxes rising.

New markets open up overseas:

- Cuts transport costs.
- Bypass trade barriers.
Government grants

To attract businesses to locate in development areas.

To attract foreign investment.
To bypass trade barriers:

- Tariffs
- Quotas
FACTORS AFFECTING THE LOCATION OF A SERVICE SECTOR
BUSINESS
Customers
Direct contact required:
- Is it convenient for customers to go the business?
- Will the service arrive at customers' houses in time?

No direct contact needed: Mail or Internet

Personal preference of owners: Near their homes.

Technology
Cheaper sites:
- Telephone.
- Internet.
- Transport.
No need to be near customers.
Availability of labour
Need to locate in sites where skilled laborers live.
Labourers may relocate to be near the business.
Climate: Important for tourism.
Near to other businesses
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Businesses that supply or repair machinery to others need to be

near them to respond quickly.
Post office/banks need to be in busy areas for the convenience
of customers. That is, being near malls, shops, etc

Rent/taxes: If the business does not need direct contact with the
customer, then it could locate in cheaper areas.
Unit 25

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