IGCSE Business

Business Activity
Aims and objectives
Goal : Something that an individual or organization tries to achieve. Business organizations have goals
that are not always to make a profit.
Strategies : The course of action required to meet the objectives
Aim : What a company wants. Its a statement of purpose. It is found in the mission statement a
written statement making clear to all stakeholders a firms overall aims and values. Enables
stakeholders to know why a company is doing what its doing)
Objective : What the company must achieve in order to meet the aims
Aims vs. Objectives:
Aims are a general statement of purpose

Objectives are measurable targets. They have to be:

o S
pecific
o M
easurable
o A
chievable
o R
elevant
o T
ime bound
Why set Objectives?
Objectives give businesses a clearly defined target. Therefore the company is able to measure progress towards
its stated aims
Plans & strategies can then be made to achieve these targets
Can motivate employees
Exemplar Objectives:
Growth
Market share
Wealth creation
Survival
Consumer satisfaction
Customer loyalty
Employee satisfaction
Environmental
Quality
Productivity/Efficiency
Levels of Objectives
1. Corporate objectives targets what the whole business is trying to achieve (often related to what the owners
of the business want to focus on e.g. profit, survival, growth, etc.)
2. Departmental objectives objectives for specific functions within a business e.g. for marketing department;
needs to be in line with corporate objectives

Public Sector Organizations:

The objectives of public sector organizations will be different as they are there not to make a massive profit but
to serve the people
Objectives will be to:
1. Deliver a public service, not a profit
2. Deliver quality service
3. Breakeven so as to not go into a loss making situation
4. Be efficient in its processes
5. To provide an essential economic service for the nation
Conflicting Objectives:
Often times 2 objectives will clash we call these conflicting objectives
They often clash between key stakeholders (owners, managers, employees & customers)
An example is that of Growth Vs. Profit for example, achieving higher sales in the short term, probably by
cutting prices, will lead to a reduction in short term profits
Another example is that of short term vs. long term for example a business may decide to accept lower cash
flows in the short term whilst it invests in new products, plants or equipment
A common example will be that of Environment Vs. Profits e.g. if a company wants to reduce its pollution
contribution, it will need to spend a heavy proportion of profits.
Why do business objectives change over time?
Business is evolving/changing
Competitive environment is changing (possibly due to technology)
Technology changes (being the main reason for the currently constantly evolving global market)
The market/customers are changing e.g. new products, like digital cameras are replacing film cameras
Summary
There are three types of organisations covered:
Not-for-profit
o Providing healthcare
o Providing education
o Providing community activities
Private enterprise
o Making a profit
o Other secondary goals
Public enterprise
o Running public services well
o Providing ferry and postal to rural communities
o Providing street lighting, police service
Types of Organizations
Things to think about:
1. Different types of businesses
2. Advantages disadvantages of each
3. Implications of the choice of business organization such as:
Control of the business
Profit distribution
Bureaucracy
How can the size of a business be measured?
1. No. employees, no. outlets, revenues, profits, capital employed amount invested in business, market value
2

Business size is relative to other companies and the market its in

Sole traders
A sole trader is a business owned by 1 person but may have multiple employees
Sole traders can often succeed:
1. They can offer specialist services
2. Can cater and specialize to suit the needs of the local community
Advantages
Disadvantages
Total control of business
Unlimited liability owner is personally liable for any debts
which the business cannot pay for
Simple + easy to set up, little formal and complicated legal Difficult to raise finance
necessities. Also quicker to startup
Quicker decision making
Difficult to specialize and enjoy economies of scale
Owner can keep all profits
Problem with continuity if owner retires or dies

Unlimited liability means that creditors may legally go after personal assets to regain their lost money. This
means that the owners may have to sell personal assets

Sole trader partnership

Spreads risk across more people
Partner may bring money + resources to business along with new skills and ideas
Increased credibility with customer and supplier
Partnership
When ownership is shared between 2 20 people (accountancy firms may have more)
Deed of Partnership
Amount of capital each partner should provide
How profits/losses should be shared
Rules on how to take on new partners
Advantages
Responsibilities and decision making is shared
Continuity + support provided. Does not come to a stop for
small thing like if the owner goes on holiday
Partners may bring expertise and resources
More finance available

Disadvantages
Unlimited liability owner is personally liable for any
debts which the business cannot pay for
Have to share profits
Disputes over workloads/roles
Problems if partners disagree on direction of business
Difficult businesses to run, partners need to trust each
other
Less control of business
One partners wrong doings can affect all the rest

Limited Companies
Companies are a separate legal person in the eyes of the law i.e. it is separate from its shareholders
Has to register with the companies house
Issued with a Certificate of Incorporation & Memorandum of Association (a document that describes what the
company has been formed to do) & Articles of Association (internal rules of the company)
In a limited company, shareholders own the company
Companies employ directors to control the management of the business and do the day to day jobs
3

These directors are often shareholders

Directors are responsible to shareholders
The reasons for hiring director can be that shareholders may not want to get involved in the day to day running of
the business & also, directors may have special skills or experience

Advantages
Limited liability shareholders liability is restricted to
the amount they have invested. They can only lose what
theyve invested. Creditors can only recover money from
existing assets of the business. They cannot claim assets
(personal) to recover amounts owed by the company (as
the company is a separate legal person in the eyes of the
law)
Easier to raise finance as shares can be issued and sold
(although not on the share market)

Disadvantages
Expensive + time consuming to set up

Shares cannot be traded on the stock

exchange therefore affecting ease of raising
finance

Continuity is not an issue as the company itself lives for

ever
Ability to specialize and enjoy economies of scale
Shares in a plc can be traded on the stock exchange whereas shares of a ltd cannot.
LTD or PLC?
Becoming a plc is all about making it easier to raise finance, for example shares in a ltd cannot be offered on the
share market to the general public, also, it restricts availability of finance, especially if business wants to expand.
Also, its generally easier to raise finance from banks and other sources
Advantages
Disadvantages
Limited liability shareholders liability is restricted to
Costly + complicated to set up
the amount they have invested. They can only lose what
theyve invested. Creditors can only recover money from
existing assets of the business. They cannot claim assets
(personal) to recover amounts owed by the company (as
they company is a separate legal person in the eyes of
the law)
Very easy to raise capital
Certain info must be made public, even to
competitors and customers
Continuity is not an issue as the company itself lives
Increased threat of takeover
forever
Able to exploit economies of scale due to their size
Greater public scrutiny and profile (e.g.
analyst reports and press reports)
Separation of ownership and control which
means that the owners no longer make all
the decisions
IPOS/Floatation
When shares are first offered for sale
A very expensive and complicated process
Company is given a listing on the stock exchange
Opportunity to raise substantial funds
Also a chance for existing shareholders to cash in by selling their shares (e.g. a VC who may have invested
earlier)
4

Why buy shares?

1. Dividends (a share of profits)
2. Capital gains (by selling the shares)
3. Control of company
Shareholders liability is limited
What are the risks in investing?
Company reduces or cancels its dividend payouts
Value of shares fall below cost
Company fails causing shareholder to lose all invested money
Franchises
A franchisor is a business that sells the right to another business (franchisee) to operate a franchise (an external
company that runs the business and keeps the profits)
Franchisor is the growth company who sells the rights of the business model and receives a % of revenue from
each franchisee (royalty)
Franchisor also provides support in marketing, training, finance and purchasing
Advantages for franchisor
Disadvantages for franchisor
Less risk
less control
Lower costs
Reputation risk
Less operations
Not as fast as M&As
Ideal for expansion of a business model
Local market awareness
Advantages for Franchisee
Disadvantages for Franchisee
Less risk as there is already a customer base and business
Licensing costs
model
Reduced startup costs
Royalty payments
Support provided in training and marketing
Less flexible
Small business but some benefits of large
MNCS: A business that operates across national boundaries
One aspect of globalization is the growth of Multinational Corporations or MNCs.
o

o
o
o
o
o
o
o
o
o
o
o
o

Benefits of MNCs
There is usually huge capital investment in major economic activities. It is called Foreign Direct
Investment (a flow on private capital from one country to another, normally a funding for business
ventures)
2. The country enjoys varieties of products, services and facilities, brought to their door steps
3. There is creation of more jobs for the local populace
4. The nations pool of skills are best utilized and put to use effectively and efficiently
5. There is advancement in technology as these companies bring in state-of-the-art-technology for their
businesses. Technology spillover
6. The demand for training and retraining and advancement in the peoples education becomes
absolutely necessary. This will in turn help strengthen the economy of the nation
7. The living standard of the people is boosted
8. Friendliness between and among nations in trade i.e. it strengthens international relations
9. The balance of payments of nations in trade are improved
10. There is significant injection into the local economy in respect to investment
11. Best utilization of the countrys natural resources
12. They help in strengthening domestic competition
13. They are good source of technological expertise
5

14. Expansion of market in the host country

Challenges faced by MNCs

1. There is usually acute shortage of manpower people with lack of managerial and technical skills
2. The challenge of unfriendly business environment
3. There is usually the problem of conflicting interest among the three parties the government, the MNC and the
general public
4. There may be huge cost of labour in the host country, at least to get the expatriate managers from home country or
somewhere else
Possible Negative impacts of MNCs
1. Size and power sometimes allow MNCs to manipulate situations to their own advantage. E.g. strategies to make
only their home country earn and not the host country. Repatriation of profits.
2. Labour exploitation and breaking international laws on child labour
3. Sometimes, unskilled jobs which require no worthwhile training have been offered to local people, which does
not improve the quality of the host countrys workforce
4. Small businesses cannot compete in production and so are driven out of business
5. Governments often feel it necessary to use grants, infrastructure development and tax concessions to attract
multinationals. The weak negotiating power and position of many governments means that multinationals can
sometimes pay less in tax compared to what they take from the government as help (either directly in grants
and subsidies or indirectly through developments in the infrastructure they require)
6. Poor health and safety or environmental standards in host countries
Summary
Positive Points:
MNCs and FDI bring capital, jobs and incomes, prompting
development
Exports or import reduction can help the trade position
Training and skill development can raise worker productivity
Consumers can have better and cheaper products with more
variety
Governments can benefit from extra tax revenue
Ethical MNCs make a major contribution to development

Negative Points:
Some MNCs corner all the benefits for themselves
Foreign currency earnings can be repatriated as profits
Local workers may only get low wage, unskilled jobs
Local businesses might be unable to compete and
forced to close
Concessions and grants might outweigh any tax receipts
Selfish MNCs might hit and run leaving long term
problems

Why become an MNC?

1. More customers
2. Economies of scale
3. Entry to protected markets
4. Reduced production costs
5. Risk reduction
Factors of Production
Land
: All of the natural resources needed to produce a good/service
Labour : All of the physical and mental effort needed to produce a good/service
Capital : All the manufactured resources used in the production process of something else e.g.
machinery (Note: capital has 2 meanings, one is the above and the other is that capital
is money/investment finance)
Enterprise
: The unique ability some people have in organizing factors of production (FoPs)
Relationships between factors of production
Availability & cost of factors
6

Developed (e.g. minimum wage laws) and Undeveloped (no wage or labour laws/restrictions)
Combination changes over time (e.g. as a country develops it will most likely use more capital than labour)
Technology
Labour is a FoP. Workers earn wages this is the price of their labour.
Wages are determined by demand and supply. The number of workers employed is also determined by the level
of demand and supply.
Division of Labour in order to make labour more efficient, firms have spilt up the production process into
small tasks. Production is increased, job specialization happens (which can be both, an advantage and a
disadvantage).

Advantages of Division of Labour and Workers

Workers may be able to choose the task for which they are best
suited. In this way they can even enjoy their work and become
more skilled at the particular task
Increased skill therefore productivity may be rewarded with an
increase in wages
If paid on a piece rate basis, more specialization = more
productivity & efficiency meaning they will receive higher wages
Less stress as the tasks a worker performs will be simple

Fewer injuries as specialist machines and robots can perform

dangerous tasks such as cutting and welding
Advantages of Division of Labour and Firms
Production will be increased, as time is saved when workers
become more skilled at one task
Economies of scale

Less time + money needs to be spent on training labour as the

tasks are simpler

Machines can replace workers for some tasks. Machines can work
24/7/365, reduce wage bills, produce consistent quality and take
over dangerous tasks
Advantages of Division of Labour and Consumers
As productivity increases firms may pass a decrease in unit costs on
to consumers at lower prices
The increased use of machinery may result in goods being
produced with a consistent quality
Disadvantages of Division of Labour and the economy

Disadvantages of Division of Labour and Workers

Workers may find the work monotonous if it is
simple and repetitive
If there is little training required to undertake
simple tasks, unskilled labour can be paid low
wages and exploited.
Lack of job satisfaction
Threat of unemployment if wokers are easily
replaced by machines which can complete the
tasks more efficiently

Disadvantages of Division of Labour and Firms

Bottlenecks can occur is one process is quicker
than another
If the workers are dissatisfied at work, then
industrial unrest can occur. This has the ability to
reduce production
The increased use of machines can lead to
problems:
The firm may have to borrow money to
purchase the machines.
Machines may break down
Machines may become obsolete and in time
will need to be replaced.
Handling of machinery needs to be done by
trained professionals

Disadvantages of Division of Labour and

Consumers
Standardization of goods, lack of variety

Disadvantages of Division of Labour and the

economy
7

Prices may fall and this can: 1. Reduce & control inflation, 2. Make
domestic goods more competitive in foreign markets
Increases in productivity may increase economic growth and the
standards of living

Unemployment may rise as machines replace

workers

Division of labour is usually done through the use of assembly lines

Advantages of being Labour intensive
Disadvantages of being labour intensive
Often intricate personal detail cannot be replicated by
Expensive, especially in countries where minimum
machines
wage laws exist
Not standardized variety
Prone to disruption in production: 1. Sickness &
health; 2. Stirkes
Production costs can be more easily controlled as labour size
Exposed to wage increases
can be adjusted according to demand fluctuations of the
market
More employment in the economy
Not standardized variety in quality
Advantages of being Capital intensive
Disadvantages of being capital intensive
More efficient & productive
Prone to breakdowns
More production = more sales = more revenues = more profits Workers may feel demotivated as they may be layed
off. This means lower production as lower morale
More competitive
Training expenses need to train employees to use
the technology
Very expensive implementation
Capital-intensive
Capital refers to the equipment, machinery, vehicles and so on that a business uses to make its product or
service.
Capital-intensive processes are those that require a relatively high level of capital investment compared to the
labour cost.
These processes are more likely to be highly automated and to be used to produce on a large scale.
Capital-intensive production is more likely to be associated with flow production (see below) but any kind of
production might require expensive equipment.
Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating
this equipment represents a substantial overhead.
In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity
utilisation).
In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of
production.
Labour-intensive
Labour refers to the people required to carry out a process in a business.
Labour-intensive processes are those that require a relatively high level of labour compared to capital
investment.
These processes are more likely to be used to produce individual or personalised products, or to produce on a
small scale
The costs of labour are: wages and other benefits, recruitment, training and so on.
Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.
Long-term growth depends on being able to recruit sufficient suitable staff.
Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.

Sectors of industry
The sectors
1. Primary
Where all raw materials and natural resources are extracted. 1st stage of production process.
Extraction through (examples): mining, fishing, forestry, agriculture, etc. (there is sometimes a conflict
between renewable vs. non renewable resources)
Also known as extractive industries
2. Secondary
Where all output from primary is processed into manufactured goods. These goods can be either
consumer goods or producer goods.
A consumer good is a good bought and used by a consumer such as a car.
A producer good (aka capital good) is a good used in the production of another good e.g. steel
Also known as manufacturing and construction industries
3. Tertiary
Production of a service rather than a good
Also known as service industries
Importance of tertiary sector of industry
1. Can assist the first 2 stages in the production process e.g. logistics
2. Can help the public or the state
3. Services to public include stuff like hairdressing and leisure facilities
4. Services to the industry include stuff like banking and insurance
5. Services to the state can include stuff like education and health
Interdependence
There is a interdependence between the 3 sectors.
Rules of interdependence:
o Primary sector will not survive if there is no demand from secondary sector
o Secondary sector will not survive if there is no help from tertiary sector, as those are the people who will
be selling the output from the secondary sector
o Tertiary sector will not survive if there is no production from primary and secondary sectors.
As a country/economy develops more of the workforce migrates to the tertiary (higher) sector. E.g. in China
there has been a steady migration of workers from agriculture industry to manufacturing industry
As all the factories moved from Hong Kong to China, there has been a transition in the services economy.
Location
Factors affecting location
Land
Labour
Infrastructure & transportation network
Raw materials
Pull of the market
Government policy
Impact of the Internet
Can reach customers without a physical presence
No geographical limitations
Both sales and customer service
Faster/cheaper entry/exit to/from markets
9

International Considerations
Taxes/tariffs
Political stability
Labour: availability, cost & skills
Market potential
Financial incentives
Bureaucracy
Corporate objectives

Judging Success
Success can be measured against objectives (which have to be SMART for this reason)
The measurement of different criteria measured against objectives size, turnover, shareholders, number of
employees, consumer reaction/satisfaction.

Key stakeholders
Shareholders
Directors
Managers/management
Employees
Customers
Suppliers
Why do companies fail?
Small companies
Lack of business skills
Economic reasons (trade cycle)
Lack of finance
Wrong understanding of the
market

Large companies
Management decisions e.g. wrong investments
Economic reasons (trade cycle)
Changes in the market
Loss of confidence by investors and creditors (e.g. a bank may refuse to pass a
loan)
Human resource management

Internal Organisation
Internal organisation: The levels of management and division of responsibilities within an
organisation.
In an organization of any size or complexity, employees' responsibilities typically are defined by what they do, who they
report to, and for managers, who reports to them. Over time these definitions are assigned to positions in the
organization rather than to specific individuals. The relationships among these positions are illustrated graphically in an
organizational chart.
Types of Organisation Structure
Line Organisation
It is perhaps the oldest and the simplest organisational structure. In this kind of structure every manager exercise a
direct authority over his subordinate who in turn directly reports to their superiors.
There is a hierarchical arrangement of authority.
Each department is self contained and works independently of other departments.
Lines of authority are vertical i.e. from top to bottom.
There are no staff specialists.

10

Advantages
Simple to establish and operate
Promotes prompt decision making.
Easy to control as the managers have direct control over their subordinates.
Communication is fast and easy as there is only vertical flow of communication.
Disadvantages
Lack of specialisation
Managers might get overloaded with too many things to do.
Failure of one manager to take proper decisions might affect the whole organisation.
However, line structures are suitable for:
small businesses where there are few subordinates
organisations where there is largely of routine nature and methods of operations are simple.
Functional Organisation
The organisation is divided into a number of functional areas. This organisation has grouping of activities in accordance
with the functions of an organisation such as production, marketing, finance, human resource and so on. The specialist
in charge of a functional department has the authority over all other employees for his function.

11

Advantages
Is logical and reflection of functions
Follows principle of occupation specialisation
Simplifies training
Better control as the manger in charge of each functional department is usually an specialist.
Disadvantages
Overspecialisation and narrow viewpoints of key personnel can limit the organisation growth.
Reduced coordination between functions.
Conflicts between different functions could be detrimental for the organisation as a whole.
Difficult for general managers to coordinate different departments.
However, it is much suitable for large organisations where there is ample scope for specialisation. Once harmony and
proper coordination among different functions is achieved, it could lead to sure success for an organisation.
Line and Staff Organisation
It is a combination of line and functional structures. In this organisation a structure, the authority flows in a vertical line
and get the help of staff specialist who are in advisory. When the line executives need advice, information about any
specific
area,
these
staff
specialists
are
consulted.
For example Chief accountant has command authority over accountants and clerks in the accounts departments but he
has only advisory relationship with other departments like production or sales.

12

Advantages
Line managers are provided by expert advice by these specialists.
Staff managers provide specialist advice which can improve quality of decisions in various departments.
Disadvantages
Line managers and staff managers might have conflicts on particular issues.
Line and staff managers might not be clear as to what the actual area of operations is and what is expected of
them. Co-ordination may be a problem.
Staff personnel are not accountable for the results and thus may not take tasks seriously.
However, Line and staff organisation is very suitable for large organisation.
Project Organisation
The project structure consists of a number of horizontal organisational units to complete projects of a long duration. A
team of specialists from different areas is created for each project. Usually this team is managed by the project
manager. The project staff is separate from and independent of the functional departments.
Advantages
Special attention can be provided to meet the complex demand of the project.
It allows maximum use of specialist knowledge thus chances of failure are very less.
Project staff works as a team towards common goal which results in high motivation level for its members.
Disadvantages
As the project staff consists of personnel from diverse fields, it might be quite challenging for the project manager to
coordinate among them.
Matrix Organisation
Matrix organisation combines two structures functional departmentation and project structure.
Functional department is a permanent feature of the matrix structure and retains authority for overall operation
of the functional units.
13

Project teams are created whenever specific projects require a high degree of technical skill and other resources
for a temporary period.
Project team form the horizontal chain and functional departments create a vertical chain of command.
Members of a particular team are drawn from the functional departments and are placed under the direction of
a project manager who has the overall responsibility of a particular project.

Advantage
Is oriented towards end results.
Professional identification is maintained
Pinpoints product-profit responsibility
Disadvantages
Conflict in organisation authority exists.
Possibility of disunity of command exists
Requires manager effective in human relations
Matrix organisations are used in industries with highly complex product systems for example, aerospace industry where
project teams are created for specific space or weapon systems.
Management
Planning
Planning is the core area of all the functions of management. It is the foundation upon which the other three areas
should be build. Planning requires management to evaluate where the company is currently, and where it would like to
be in the future. From there an appropriate course of action to attain the company's goals and objectives is determined
and implemented.
The planning process is ongoing. There are uncontrollable, external factors that constantly affect a company both
positively and negatively. Depending on the circumstances, these external factors may cause a company to adjust its
course of action in accomplishing certain goals. This is referred to as strategic planning.
During strategic planning, management analyzes internal and external factors that do and may affect the company, as
well as the objectives and goals. From there they determine the company's strengths, weaknesses, opportunities and
threats. In order for management to do this effectively, it has to be realistic and comprehensive.
Organizing

14

Getting organized is the second function of management. Management must organize all its resources in order to
implement the course of action it determined in the planning process. Through the process of getting organized,
management will determine the internal organizational structure; establish and maintain relationships, as well as
allocate necessary resources.
In determining the internal structure, management must look at the different divisions or departments, the coordination
of staff, and what is the best way to handle the necessary tasks and disbursement of information within the company.
Management will then divide up the work that needs to be done, determine appropriate departments, and delegate
authority and responsibilities.
Directing
The third function of management is directing. Through directing, management is able to influence and oversee the
behavior of the staff in achieving the company's goals, as well as assisting them in accomplishing their own personal or
career goals. This influence can be gained through motivation, communication, department dynamics, and department
leadership.
Employees that are highly motivated generally go above and beyond in their job performance, thereby playing a vital
role in the company achieving its goals. For this reason, managers tend to put a lot of focus on motivating their
employees. They come up with reward and incentive programs based on job performance and geared toward the
employees' needs.
Effective communication is vital in maintaining a productive working environment, building positive interpersonal
relationships, and problem solving. Understanding the communication process and working on areas that need
improvement help managers to become more effective communicators. The best way to find areas that need
improvement is to periodically ask themselves and others how well they are doing.
Controlling
Controlling is the last of the four functions of management. It involves establishing performance standards based on the
company's objectives, and evaluating and reporting actual job performance. Once management has done both of these
things, it should compare the two to determine any necessary corrective or preventive action.
Management should not lower standards in an effort to solve performance problems. Rather they should directly
address the employee or department having the problem. Conversely, if limited resources or other external factors
prohibit standards from being attained, management should lower standards as needed.
The control process, as with the other three, is ongoing. Through controlling, management is able to identify any
potential problems and take the necessary preventative measures. Management is also able to identify any developing
problems that need to be addressed through corrective action.
In order for management to be considered successful, it must attain the goals and objectives of the organization. This
requires creative problem solving in each of the four functions of management. More so, success requires that
management be both effective and efficient. Therefore, it needs to not only accomplish those goals and objectives, but
do it in a way that the cost of accomplishment is viable for the company. Short-term
The recruitment and selection process
Recruitment
Involves attracting the right standard of applicants to apply for vacancies
Recruiting may be internal or external
Internal recruiting means employing someone already working for the organization: this may mean
promotion
External recruitment involves appointing someone from outside the organization
15

 The table below shows the advantages of both

Advantages of internal recruitment
Advantages of external recruitment
There is less risk because the employer already knows the New ideas are brought into the organization from outside
person and their capabilities
The cost of advertising is saved, so the recruitment process Advertising externally may reach more widely into the
is cheaper. (In some countries and organisations, however, business community (e.g. a teacher might be attracted to
equal opportunities legislation means that all positions an educational publishing company and bring useful
have to be advertised.
experience and knowledge to the job)
The opportunity for promotion within the organization Internal jealousies are avoided from promotion
encourages people to work hard
Induction costs are saved.
Recruitment process
The typical stages in the recruitment process are as follows
1. Identify a job vacancy exists
2. Draw up a job specification
Once a vacancy arises the human resource manager will first identify and record the responsibilities and
tasks which are related to the job. After analysing the responsibilities and tasks they are noted down which
becomes the Job description for the job. It includes:
A job title
Department of the business in which the new employee would work
Details of the tasks to be performed
Responsibilities involved
Place in the hierarchical structure
Methods of assessing the performance
3. Draw up a person specification
On the basis of Job description, a job specification is made. It is a document which outlines the
requirements, qualifications and qualities, skills and knowledge required for the job.
4. Advertise the post
Can be advertised internally (on the company notice board or newsletter)
Can be advertised externally in a newspaper or magazine.
Advertisement will usually contain the elements of a person specification with additional information
like the name and profile of the company, date and time of interview, address of the company and the
contact person etc.
5. Create a shortlist
Applications most near to the job specification will be called for an interview
Those who do not qualify will be rejected
6. Interview
The shortlisted candidates will be called for an interview to verify their qualifications, personal qualities
and aptitude for the job.
May involve a face to face discussion between the interviewer and interviewee.
The firm may also conduct skill test, aptitude tests or personality test if it deems fit so.
7. Appoint the most suitable candidate
The candidate who scores the maximum in the interview will be selected for the job and given an
appointment letter and contract
The job description
Whenever a business recruits, it is essential to set out a clear description of what the job entails
Title of the job
Indication of what the job involves and the level of responsibility (e.g. sales
manager, South East Asia)
Department and location of the job
Organisational department and its location (e.g. marketing and sales
16

department, Beijing, China)

General terms of what is involved in Indication of what is involved in the post (Many job vacancies describe the job
carrying out the job
in fairly general terms, particularly if these might change over time)
Responsible to whom
Who the employee will report to, their line manager
Responsible for whom
Other employees for whom the employee will be responsible and manage
Other responsibilities
Resources for which the employee will be responsible and manage
Scope of the post
Sets out the level of the post (e.g. managerial)
Education and qualifications
The level of education required to carry out the post
Name of compiler and approver and The person who designed the job description and the date on which the
date of issue
description was written.
Different media for advertising jobs
Websites can target local, national and international job seekers
Newspapers and magazines are useful for targeting applicants. National newspapers often advertise certain
types of jobs on particular days. Magazines are often targeted at special interest groups e.g. accountants or
marketers who may be looking for jobs
Local radio can attract local recruits, particularly in urban areas
Vacancy boards/noticeboards in prominent locations such as supermarkets are useful for recruitment
Other suitable media include adverts on the sides of trains, buses and in bus and train stations
Training
Training involves improving the skills, knowledge and attitudes of employees so as to become more efficient and
productive. There are two main types of training: on-the-job or off-the-job. On-the-job is when a worker gets training by
watching a more experienced worker doing the job. It is on-the-job training common for unskilled and semi-skilled jobs.
Thus the worker gets trained while he is performing his regular duties. Off-the-job is when a worker goes away from the
place of work to attend a special course. The training can be in the form of a seminar, workshop or a college course. Off
the job training is usually conducted for managerial level employees.
The main purposes of training
Induction
o Introduces an employee to a new job and to the company and/or the workplace
o It will usually include an overview of the company
o There will be information specific to certain industries
o Getting to know other people and being introduced to company procedures
Understanding the job requirements
o Initial training should focus on making sure that an employee is able to fulfill the basic requirements of
the job
Development of job skills
o Specialist skills will need to be developed to enable an employee to do job well
o These might be interacting with customers or using important IT applications
Broadening knowledge of the business
o The more trainees know about the wider activities of the business and the nature of its work, the more
they will be able to help the organization meet it objectives
Changing attitudes and skills
o Organisations frequently have to make changes
o Training needs to be designed to help individuals adapt to new attitudes which move the organization
forward
Motivation and Rewards
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,
17

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.

Nowadays, machinery is more common in businesses which results in increased productivity as well. However,
the amount that a well-motivated workforce can produce must still be recognized, since employees are a firms
greatest assets.
Importance of motivation in a business
A positive motivation philosophy and practice should improve productivity, quality, and service. Motivation helps the
business:
To achieve its set goals and targets
Improves efficiency and productivity
Reduces wastage
lower level of staff turnover which leads to lower recruitment and training costs
Lower rate of absenteeism
Better quality of products which improves the business image in the long run
Types of motivators
There are three ways to motivate a workforce:
financial motivators
non-financial motivators
ways to increase job satisfaction
Financial rewards
Pay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here are the
most common methods of payment:
Wages
Wages are paid every week, in cash or straight into the bank account, so that the employee does not have to wait long
for his/her money. People tend to pay wages to manual workers. Since wages are paid weekly, they must be calculated
every week which takes time and money. Wages clerks are paid to do this task. Workers getextra pay for
the overtime that they do. There are some ways that wages could be calculated:
Time rate
Time rate is payment according to how many hours an employee has worked. It is used in businesses where it is difficult
to measure the output of a worker.
Pros:
o Easy to calculate the wage of the employee. A time-sheet must be filled out by the Accounts
department to calculate the wage.

Cons:
o Both good and bad workers get paid the same wages. Therefore, more supervisors are needed to
maintain good productivity. A clocking-in system is needed to know how many hours an employee has
done.
Here is an example of a wage slip and time-sheet:

18

They show:
Basic pay + Overtime = Gross Pay
Gross pay - Deductions = Net Pay
Deductions include:
Taxes
Pension
Union fees
National insurance: entitles the payee to short-term unemployment benefits, sickness benefits and state
pension.
Piece rate
Piece rates are paid depending on how many units they have produced. There is usually a base pay (minimum wage) and
the piece rate is calculated as a bonus on how many units were created. Piece rates are found in businesses where it is
possible to measure workers productivity.
Pros
o Encourages workers to work faster and produce more goods.

Cons
o Workers will often neglect quality, and businesses will need a quality control system which is expensive.
o Workers who focus on quality will earn less. Tension is caused when some workers earn more than
others.
o If machinery breaks down, employees earn less. That is why there is a guaranteed minimum pay.
Salaries
Salaries are paid monthly, and normally straight into the bank account. They are usually for white collar workers. A
salary is counted as an amount per year that is divided into 12 monthly accounts. You do not usually receive overtime.
Managers only need to pay their workers once a month, and since the amount is transferred by the bank, the manager
loses
much
less
time
and
money
calculate
salary.
Salaries are usually a standard rate, but other rewards could be given to employees:
Commission
19

A percentage is paid, usually to sales staff, depending on the value of goods they have sold. Workers are
encouraged to sell more. However, they could persuade customers to buy products they don'r really
want, making the company look bad. Just like the piece rate, in a bad month where there are little sales,
worker's pay will fall.
Profit sharing
o Employees receive a percentage of the profits made. However, they will get nothing if the business
doesn't make a profit. This is often used in the service sector, where it is hard to find an employees
contribution to the company.
Bonus
o A lump sum paid to employees who have done well. It is usually paid at the end of the year or before
holidays. However, this could cause jealousy between workers. Giving bonuses to a team works better.
Performance related pay
o Employee pay is linked to the effectiveness of their work. It is often used in organisations where it is
hard to measure productivity. It uses the system of appraisal: employees are observed and their
colleagues are interviewed to determine their effectiveness. Afterwards, the immediate superior of the
employee has a meeting with them to discuss their effectiveness.
Share ownership
o Employees receive some shares from the company. They will either benefit from dividends or sell the
shares when their price has risen. They will be more motivated because they feel like apart of the
company.

Motivating factors - non-financial motivators

There are other factors that motivate people in a business, and they are often called perks or fringe benefits. They may
be having free accommodation, free car, etc... However, when you look at it, it is just money in different forms. Here is a
list of these motivators:
Children's education.
Discounts on company products.
Free Healthcare.
Company vehicle.
Free accommodation.
Share options.
Expense accounts.
Pension.
Free holidays.
Job satisfaction
Employees will become more motivated by enjoying the job they do. Job satisfaction can come in different ways.
However, there are some factors that demotivate employees if they are not satisfied, and must be satisfied before the
motivators can take effect. Here are some things that make workers' jobs satisfying:
Pay.
Promotion.
working conditions.
Fringe benefits.
Management
Working hours.
The nature of the work itself.
Colleagues, etc...
Herzberg and Maslow stresses that things such as responsibility recognition is also crucial to provide job satisfaction.
Letting workers contribute to the job would also help, making jobs less boring and more creative. Here are some policies
to increase job satisfaction:

Job rotation
20

Workers in a production line can now change jobs with each other and making their jobs not so boring. It
helps train the employee in different aspects of their jobs so that they can cover for other employees if they
do not show up.
Job enlargement
o
Adding tasks of a similar level to a worker's job. Job enlargement simply gives more variety to employees'
work which makes it more enjoyable.
Job enrichment
o
Adding tasks of a higher level to a worker's job. Workers may need training, but they will be taking a step
closer to their potential. Workers become more committed to their job which gives them more satisfaction

Autonomous work groups or teamworking:

This is when group of workers are given total responsibility to organise themselves and perform a task. This makes the
employees feel more important, as well as giving them a sense of belonging when they are part of a team. If they
organise themselves differently every time, the team could get job enlargement and job enrichment too.
Leadership
Studies have shown that leadership has a great impact on worker's motivation. Good managers have leadership
skills that inspire their workers to work better, as well as directing them with a common goal. Managers use many styles
of leadership, and they can be summarised into 3 main styles:
Autocratic leadership:
The manager controls all aspects of their subordinates' work.
They keep themselves separate from employees.
Employees are expected to obey every command and cannot contribute to decisions.
Communication is only top-down.
Laissez-faire leadership:
Objectives are shown to employees, but the task is completely delegated to them.
Communication can be difficult since clear instructions are not given.
The manager has a limited role in this type of leadership.
Democratic leadership:
The manager discusses tasks with his employees before making decisions.
Communication will be two-way, both top-down and bottom-up.
Here is a diagram to summarise the leadership styles:

The style of leadership used can vary depending on situations where they are the most effective.
Formal and informal groups
A formal group is an official group that is formed to do a specific task in an organisation. An informal group is a group of
people which are formed independently by themselves. They are not official, but the people in the group have
a common interest or cause. Both of these groups are needed in business, and let's see why in this example. e.g. a
21

school might create a football team (formal group) but the players need to bond together to play effectively (informal
group).
Formal groups in business
Departments withing a business are good examples of formal groups. From time to time different groups might be set
up to cope with different problems or do different tasks. Sometimes people from different departments could come
together in a group to do a team project.
Informal groups in business
There are can be many informal groups in a business that can increase the motivation of workers because they have a
true sense of belonging. e.g. There is a group of factory workers who are interested in basketball, and they form an
informal group, as a result, when they get back into their formal group they are likely to co-ordinate better with each
other.
There are other scenarios where two departments merge to become one, making them one formal group. However, the
people from these former departments still see themselves as separate from each other. These two groups of people
will refuse to co-operate until they are also merged into an informal group. Therefore, informal groups should be
handled carefully in business to yield the best results.
Regular meetings, free holidays, sporting events and such things could be organised to create informal groups and use
them in a more positive way to avoid them getting into the way of business activity.
Motivation theories
People work very hard when they are working for themselves. When they work for other people, less so. Managers have
been looking into what makes employees contribute their fullest to the company and these studies have resulted four
main theories of motivation.
F.W.Taylor
Theory:
Money is the main motivator.
If employees are paid more, they work more.
Work is broken down into simple processes, and more money is paid which will increase
the level of productivity an employee will achieve.
The extra pay is less than the increased productivity.
Cons:
Workers are seen rather like machines, and this theory does not take into account non-financial motivators.
Even if you pay more, there is no guarantee of a productivity rise.
It is difficult to measure an employees output.
Maslow
Maslow created what is know as the hierarchy of needs. In this diagram, there are 5 different types of motivation:
Physiological needs: basic requirements for survival.
Security needs: the need to by physically safe.
Social needs: the need to belong and have good relationships with co-workers.
Esteem needs: the need for self-respect and to be respected by others.
Self-actualisation needs: the need to reach your full potential and be promoted.
Diagram

22

Businesses realise that the more levels of motivation are available to workers, the harder they will work. Maslow also
suggest that each level of motivation must be achieved before going to the next level. Once one level of motivation is
met, more of that will no longer motivate the employee.
Cons:

Some levels are not present in some jobs.

Some rewards belong to more than one level on others.
Managers need to identify the levels of motivation in any job before using it to motivate employees.
Herzberg
To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have motivational
factors/motivators, that are required for the human to grow psychologically.
Hygiene factors:
Status.
Security.
Working conditions.
Company policies and administration.
Relationship with supervisor.
Relationship with subordinates.
Salary.
Motivational factors:
Achievement.
Recognition.
Personal growth/development.
Advancement/promotion.
Job satisfaction.
To Herzberg, if the hygiene factors are not satisfied, they will act as demotivators. They are not motivators, since the
motivating effect quickly wears off after they have been satisfied. True motivators are Herzberg's motivational factors.
McGregor
McGregor splits his theory into what managers believe. One type believes in theory X, while the other type believes
in theory Y. Here is the table:
23

Here are some differences in how a X manager will work and how an Y manager will work:
X managers believe that people are naturally lazy, and has to be pushed with external factors to work harder.
(e.g. higher pay).
Y managers believe that people want to do a good days work but need a good environment to do the work. A
better environment is an internal factor.
X managers will try to provide incentives and supervision for employees to work hard.
Y managers will try to provide a favourable environment so that employees can enjoy their work.
Theory's like Taylor's theory are X theories, while others like McGregor's theory are Y theories. People may say that
money is the main motivator, but studies have shown that many people leave jobs because other motivational factors
are not available to them.
Ending employment
Key ideas
A contract of employment can be ended by either party
There are reasons for employees ending employment:
o Might be retiring
o Might be bored or undervalued
o Theyve found a better job
o May be moving out of the area
o Conflict in the workplace
o Medical conditions
o Personal issues
Labour Turnover
This is used to measure how many people leave a business over the period of a year
Businesses will want this to be low as possible because it costs money and time to:
o Advertise
o Recruit workers
o Train new workers
Why reduce workforce?
New technology can now do their job
o ATMs replacing bank tellers
o Factory machinery replacing factory workers
Costs need to be reduced
o De-layering
Demand for their product is low
o Bookstores
o Video stores

All are examples of redundancy.

How can the workforce be reduced?

Businesses can reduce the number of workers by:
Offering early retirement
o Expensive since payments will have to be made
Not replacing people who leave
o Known as natural wastage
Making new jobs art-time rather than full-time
o Reduces the number of hours that must be paid for
Asking for volunteers to be made redundant
24

Still have to pay redundancy money

Dismissal
Occurs when an employer terminates a workers employment contract
Often known as giving them the sack
Many reasons for dismissal
o May be unfair or unfair
o Fair dismissal may include:
Poor timekeeping
Stealing company property
Bullying and harassing other workers
Criminal damage to workplace
Not declaring a criminal conviction
e.g. the worker lied on their application form
o Unfair dismissal may include:
Selecting people for redundancy because they are in a trade union
Sacking a female because she is pregnant
Sacking a worker for incompetence when no training has been given
Dismissing someone because of their gender or race
If a firm is found to have dismissed someone unfairly, they can be heavily fined.
o If you have been unfairly dismissed, you can seek a lawyer and go to court to have a hearing. If found
that you have been unfairly dismissed, you will be compensated.
Can be categorized as:
o Misconduct
Behavior at work may result in a verbal warning or written warning
o Gross misconduct
Like a criminal conviction e.g. coming into work drunk or high.
Exact legal requirements vary from country to country
A worker may prove that the true cause for dismissal was, for example, some form of prejudice, which would be
unfair1
Redundancy
Occurs when a job is no longer needed
Accounting and Finance
Sources of Finance
Internal sources of finance: The money raised from inside the business
External sources of finance: The money raised from outside the business

25

A business might have access to various sources of financing its needs. These sources of finance can be classified as
internal and external:
Internal
Sales of assets
o Business might sell off old, obsolete assets which are no longer used by the business to raise additional
cash for the business.

Advantage

Disadvantage

Better use of capital

A new business might not have any old or

obsolete assets

Retained profits
o Businesses (especially limited companies) usually keep some part of the profit every year for future use.
This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which
can be used for financing the business.
Advantage

Disadvantage

Does not increase liabilities Not available to new businesses

No need to pay interest

Reduction in working capital

o Cutting the stock levels can also help the business to raise additional cash.
Advantage

Disadvantage

Costs related to storage of stock is May lead to shortage of stock and loss of
reduced
sales

External
Short Term
26

Bank overdraft
o Bank overdraft is a facility given by banks to its business customers, people having current accounts.
Through this facility the customers can overdraw their accounts to a greater value than the balance in
the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a
limit to overdraw from the account and the business can meet its short term liabilities by writing
cheques to the extent of limit allowed.
Advantage

Disadvantage

No need for collaterals or security.

Interest rates are usually variable and

higher than bank loans.
More flexible and the overdraft amount can Cash flow problems can arise if the bank
be adjusted every month according to asks for the overdraft to be repaid at a short
needs.
notice.

Trade Credit
o Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This
can range from 1 week to 90 days depending upon the type of business
and industry
o

By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance
which can be used for more important expenditures.
Advantage

Disadvantage

No interest has to be paid.

The business may not get cash

discounts.

Factoring of debts
o It involves the business selling its bills receivable to a debt factoring company at a discounted price. In
this way the business get access to instant cash.

Medium Term
Hire purchase
o It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is
paid as down payment and the rest is paid in installments for the period of time agreed upon. The
business has to pay an interest on these installments.
Leasing
o Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a
building or machinery and a periodic payment is made as rent, till the time the business uses the
assets. The business does not need to purchase the asset.
Advantage

Disadvantage

27

The business can benefit from the asset without The total cost of leasing may end up higher than the
purchasing it.
purchasing of asset
Usually the maintenance of the asset is done by the
leasing firm.

Medium term bank loan

o A bank loan for 1 year to 5 years.

Long term
Long term bank loan
o borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing.
This interest may be fixed or variable. Businesses taking loan will often have to provide security or
collateral for the loan.

Issue of share
o It is a permanent source of finance but only available to limited companies. Public limited companies
can sell further shares up to the limit of their authorized share capital. Private limited companies can sell
further shares to existing shareholders.
Advantage

Disadvantage

Permanent
source
of
capital. Dividends have to be paid to the
In case of ordinary shares business will shareholders.
only pay dividends if there is a profit.

Debentures
o A debenture is defined as a certificate of acceptance of loans which is given under the company's stamp
and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of
interest rates) and the principal amount whenever the debenture matures. It is issued for a long periods
of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have
no voting rights and the interest given to them is a charge against profit.

Sales and lease back

o this involves a firm selling its assets or property to an investment company and then leasing it back over
a long period of time. The business thus can use the asset without purchasing it and can use the revenue
earned from its sale for other purposes.

Choosing the right source of finance

Factors affecting the choice of finance
With so many sources of finance to choose from, a business has to carefully select the appropriate one. The following
points may be considered while selecting the most appropriate source of finance.
Type of expenditure: Whether the finance is needed for capital expenditure or revenue expenditure. Issue of shares will
be more appropriate for limited businesses who want to expand rapidly. If it is a cash flow problem then bank overdraft
may be more appropriate.
How long the business needs the finance?
How much amount is needed?
What is the status and size of the business?
28

o A small business might not be able to raise additional capital through issue of shares.
What is the capital composition of the business?
o Highly geared businesses (i.e. with more debt capital and less equity) would rather go in for equity
financing.
What will bank see before lending money?
o When applying for loan the bank manager or your creditor might be interested in knowing the status of
your business. They will review your
Balance sheet: to see how much you own and how much you owe to others.
Profit and loss account: to see the profitability of your business.
Cash flow forecast: Predictions about how much and from where cash will come in and go out.

Budgets and Cashflow

Budgets
A budget is a document that translates plans into money - money that will need to be spent to get your planned
activities done (expenditure) and money that will need to be generated to cover the costs of getting the work
done (income).
It is an estimate, or informed guess, about what you will need in monetary terms to do your work.
Different budgeting techniques
The two main techniques for budgeting are incremental budgeting and zero based budgeting.
Incremental budgets
Incremental budgets are budgets in which the figures are based on those of the actual expenditure for the previous
year, with a percentage added for an inflationary increase for the next year.
This is an easy method that saves time but it is the lazy way and is often inaccurate.
This budgeting technique is only suitable for organisations where each year is very similar to the previous one in
terms of activities.
Very few dynamic organisations or projects are so stable that this budgeting technique really works for them.
Zero based budgets
In zero based budgets, past figures are not used as the starting point. The budgeting process starts from scratch
with the proposed activities for the year.
The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this
way.
This technique is essential for new organisations and projects, but it is also probably the best route to go in a
dynamic organisation that is proactive in taking on new challenges.
Limitations of Budgeting
Budgeting is a time consuming and costly job. The development of budget includes many repetitive steps before the
budget is finally approved.
Compared with its costs, budgeting provides little valuable, reliable and relevant information.
Budgets are based on assumptions that often turn out to be inaccurate.
Budgets also cause great deal of waste and behavioral problems. Peoples main goal is to meet the budgets, so they
always try to negotiate to get lower targets with lower sales and higher costs, which are well known as padding the
budgets.

29

A sample budget statement

Advantages
It provides targets
Involving staff motivates them
You can use variances to highlight weaknesses
The coordination between departments is improved

Spending is controlled

Disadvantages
If the target is unrealistic, it can be
demotivating
If staff are not involved, demotivation
If not flexible, the business could lose
business opportunities
Conflicts may arise if, especially between
managers, if targets are not met, hence
leading to a reduction in the level of morale
Large amounts of money may be dangerous in
the wrong hands

Ability to identify problems early. This means that you

can do enough preparation in advance and prevent
danger e.g. apply for an overdraft facility a month in
advance

30

Cash flow forecast

Cash inflow
Cash inflow means all the sources from which cash comes into the business over a period of time.
Cash inflow can result from
Cash sales
Payment received from debtors
Investment by owner
Loans and overdrafts
Cash outflow
Cash outflow means all the sources from which cash goes out of the business over a period of time.
Cash outflow can result from
Cash purchases
Payment of wages and salaries to staff
Purchase of fixed assets
Payments to Creditors
Repaying loans
Miscellaneous expenses.
Cash flow forecasts
Cash flow forecast is a budget or estimate which identifies the anticipated income and expenditure and the time when it
is likely to take place, usually on a month by month basis.
Purpose of Cash flow forecast
The primary purpose of the cash flow budget is to predict the sources and uses of cash and to identify your cash position
for a specific time period (daily, weekly, monthly etc.).
Cash flow problems
Sometimes a profitable business might face cash flow problems. It may be due to
There might be a sudden fall in sales whereas the expenses may not come down in the same proportion.
Any unforeseen expenses may lead to high cash outflow as compared to cash inflow in that particular period.
Debtors payback period is too long.
Main causes of a liquidity crisis
1.
Slow or no payment from customers
2.
Sales not as high as predicted
3.
Costs higher than predicted
4.
Unexpected costs arise e.g. something breaks and maintenance is needed
5.
Interest rates are higher than predicted (variable rates)

31

A sample CFF

Advantages of a cash flow statement

1. It shows the actual cash position available with the company between the two balance sheet dates which funds
flow and profit and loss account are unable to show and therefore it is important to make a cash flow report if
you want to know about the liquidity position of the company.
2. It helps the company in making accurate projections regarding the future liquidity position of the company and
hence arrange for any shortfall in money by making arrangements in advance and if there is excess than it can
help the company in earning extra return out if idle funds.
3. It acts like a filter and is used by many analyst and investors to judge whether company has prepared the
financial statements properly or not because if there is any discrepancy in the cash position as shown by balance
sheet with cash flow statement than it means that statements are incorrect.
Disadvantages of a cash flow forecast
1. Since it shows only cash position, it is not possible to arrive at actual profit and loss of the company by just
looking at this statement alone.
2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc,
and therefore limiting its use
Improving cash flow
Speed up cash coming in the company by:
Increasing sales
Taking an overdraft or short term loan
Payment terms for customers
Increasing owners capital
32

Slow down cash going out of the business by:

Lease vs. buying equipment
Renting vs. owning buildings and the premises within which the company works
Reduce investment
Trade credit with suppliers
Reducing owners withdrawals
Exam question
How can budgeting aid decision making (3 marks)?

Helps the owners of a business take appropriate measures beforehand to prevent a worsening of a situation (1
mark)
Targets can be made after to motivate staff and so decisions about the future can be made (1 mark)
It can allow a business to publish accurate decisions on expenditure (1 mark)

Costs and Breakeven

Fixed cost: All costs which do not change with the change in output. Example rent, interest charges.
Variable cost: All costs which change with the change in output. Example materials, fuel and labour
cost.
Total cost= fixed cost + variable cost
Revenue:
Income
from
sales
of
goods
and
services
(Quantity
sold
Breakeven point: Level of output where the sales revenue is equal to the total cost. That level of
output where there is no profit or loss. If a business is unable to reach this level of
output it will suffer a loss from this product. Any output in excess of break even
generates profit for the company.
Margin of Safety: The horizontal distance between the breakeven level of output and the current
level of output is known as margin of safety.

Price)

The Break-even chart

These are graphs which show how costs and revenues of a business change with a change in sales. They show the level
of sales the business must make in order to break even.

33

Method of plotting Break even chart

Calculate fixed cost, total cost and Sales at different levels of output in a table
Plot the Sales on X axis, Output on Y axis
Plot fixed cost from the table
Plot total cost from the table
Plot sales from the table
The point at which the sales (total revenue TR) line crosses the total cost (TC) line is the breakeven point.
Breakeven point can be expressed in Output as well as in Value.
Uses of break-even analysis
Measure profit and losses at different levels of production and sales.
To predict the effect of changes in price of sales.
To analysis the relationship between fixed cost and variable cost.
To predict the effect on profitability if changes in cost and efficiency.
Criticism of break-even analysis
Fixed cost is represented as a straight line but in actual fixed costs is likely to change at different levels of
output. A stepped line may represent fixed cost more accurately.
Assumes that sales prices are constant at all levels of output.
Assumes production and sales are the same.
Breakeven charts may be time consuming to prepare.
It can only apply to a single product or single mix of products
Breakeven point: Calculating method
This method involves calculating break even output without the use of graphs.
Calculate the Contribution per unit.
Contribution is the excess of price over variable costs. Any money received over the variable costs makes a contribution
towards the fixed costs.
Contribution per unit = Selling price per unit Variable cost per unit
Divide Fixed Cost by Contribution per unit
(Fixed cost/contribution per unit)
This will give you the break even output.
Break-even in revenue
(Break even (in units) X price per unit
Financial statements
Trading Account: The trading account reveals the gross profit of the business.
Gross profit: The difference between sales revenue and the direct cost of the goods sold.
Cost of goods sold: The cost of purchasing the goods from suppliers (in case of retailing business) or
the cost of producing the goods that are sold.

34

Profit and loss account

This account shows the net profit of the business.
Net profit = (Gross Profit Expenses and Overheads) + Income from non trading activities
Appropriation account is that part of the profit and loss account which shows how the profit after tax is distributed. This
profit can be distributed as dividends or can be kept in the company as retained profits.

Balance Sheet
Balance sheet shows the value of a businesss assets and liabilities on a particular date.
It records what the firm owns (assets), what it owes (liabilities), what it is owed and how it is financed (owners equity).

35

Balance Sheet Terms

Assets: all those items of value which are owned by the business. Assets are further categorized as
fixed assets and current assets.
Fixed Assets: All those assets which are owned by the business for a period of more than one year.
For example, Vehicle, machinery, land, building.
Current Assets: all those assets which are owned by the business for a short period of time. Example
Cash, stock, debtors.
Liabilities: All items owed by the business. Liabilities can be classified in two types:
Long term liabilities: These are long term borrowings which are owed by the business for more than
one year. Examples include long term bank loans.
Current liabilities: These are defined as obligations or debts of the business which have to be settled
within one year. Example includes Creditors and bank overdrafts, stock.
Working Capital: Also known as net current assets= Current assets - Current liabilities
Working capital is needed for the day to day functioning of the business. A shortage
of working capital can lead to cash flow problems.
Net assets: Fixed assets + Working Capital
Shareholders fund: The total sum of money invested into the business by the shareholders.
Capital employed: It is the total long term liabilities and shareholders funds which have been used to
pay for the net assets of the business.
Capital employed = Net assets
Accounting Equation
Assets= Liabilities + Shareholders funds
Ratios and Performance
Profitability ratios
These ratios measure the profit in relation to sales or capital employed.
Gross profit margin
Gross Profit Margin shows the relationship of gross profit and sales turnover.
GrossProfit
Gross Profit
X 100
Margin=
Sales
36

turnover
A lower ratio may be the result of the following factors
Decrease in selling price of goods sold
Increase in cost of goods sold
Over valuation of opening stock or under valuation of closing stock
Net profit margin
It is an index of efficiency and profitability of a business.
Net Profit
NetProfit Margin=
X 100
Sales turnover
Mark up cost refers to profit expressed as a percentage of cost price.
Gross Profit
Mark Up=
X 100
Cost of goods sold
Rate of return on Capital (ROCE)
It shows the return on the investment made by the owner.
Net Profit
Return on Capital employed=
Capital

X 100

Efficiency ratios
These ratios state how efficiently certain areas of the business are performing.
Stock turnover ratio
It indicates the number of times in a year the average stock can be sold off. The more times the stock is sold the more
efficient the business.
Cost of goods sold
Stock turnover ratio=
Average stock at cost price
Average Stock is calculated as (Opening stock + Closing stock)/2
Asset turnover ratio
Asset turnover is a measure of how effectively the assets are being used to generate sales. It is one of the ratios that
would be considered when interpreting the results of profitability ratio analyses like ROCE.
Sales turnover
Asset turnover ratio=
Total assets-current liabilities
If the asset turnover is high than its competitors, it shows as an over investment in assets.
However, a new firm may have a higher asset turnover ratio than its competitors as the assets are newer and have a
higher value. Moreover, some firms may use a lower rate of depreciation than its competitors.
In some cases, firms may purchase assets whereas its competitors firms are leasing assets.
Trade debtor collection period (Debtors days)
This ratio indicates how efficient the company is at controlling its debtors.
Total Debtors
Debtors days=
X 360
Total Sales turnover
Trade creditor payment period (Creditors Days)
This ratio indicates how the company uses short term financing to fund its activities.
Total Creditors
Creditors days=
X 360
Cost of sales
37

Both these ratios are useful for intra-firm comparison.

Liquidity ratios
It measures the availability of cash and other liquid assets to meet the current liabilities of the firm.
Current Ratio
The current ratio compares total current assets to total current liabilities and is intended to indicate whether there are
sufficient short-term assets to meet the short-term liabilities.
Current assets: Current liabilities
The ratio when calculated may be expressed as either a ratio or 1, with current liabilities being set to 1, or as number of
times, representing the relative size of the amount of total current assets compared with total current liabilities.
A ratio of 2:1 or current assets as 2 times is considered to be healthy for a business.
Acid test ratio
It is quite similar to Current ratio. The only difference in the items involved between the two ratios is that the acid test
ratio or quick ratio does not include stock.
Current assets Stock
Acid Test ratio
=
Current liabilities
An acid test ratio 1:1 is considered as healthy. If it is below 1 it suggest the business has insufficient liquid assets to
meet their short term liabilities.
Limitations of Ratio Analysis
Differences in definitions
Comparisons are made difficult due to differences in definition of various financial terms.
Ratio Analysis can be used for:
Inter-firm Comparisons
o Comparing the performance of one firm with another firm in the same industry.
Intra-firm Comparisons
o Comparing the performance of a firm with previous years performance.
Marketing
The Market
Usually it is not economical for a company to focus its marketing effort to the whole market. The reason behind is that
some people might be interested in buying your product and some might not be, so you are wasting your time and
effort on those people who dont want to buy your products.
Bases of Segmentation
Age
o Products for kids, teens, old people.
Income
o different income levels of different people
Lifestyle
o types of activities people do to spend their time.
Region
o cold, hot, wet and dry places.
Gender
o male or female.
Use of the product:
38

Car may be used by a individual for private purpose or may be used by somebody else as a taxi.

The Marketing Mix

The 'marketing mix' is a set of controllable, tactical marketing tools that work together to achieve company's objectives.
Elements of the marketing mix are often referred to as 'the four Ps':
Product - A tangible object or an intangible service that is mass produced or manufactured on a large scale with
a specific volume of units. Intangible products are often service based like the tourism industry & the hotel
industry. Typical examples of a mass produced tangible object are the motor car and the disposable razor. A less
obvious but ubiquitous mass produced service is a computer operating system.
Price The price is the amount a customer pays for the product. It is determined by a number of factors
including market share, competition, material costs, product identity and the customer's perceived value of the
product. The business may increase or decrease the price of product if other stores have the same product.
Place Place represents the location where a product can be purchased. It is often referred to as the
distribution channel. It can include any physical store as well as virtual stores on the Internet.
Promotion Promotion represents all of the communications that a marketer may use in the marketplace.
Promotion has four distinct elements - advertising, public relations, word of mouth and point of sale.
Product
Product can be goods or service. Goods are of two types:
Consumer goods
o Goods which are consumed by people such as chocolate, washing machine, television etc.
Producer goods
o Goods which are used by producers or manufactures to produce further goods and services e.g. bottling
plant, machinery, trucks etc.
Services are also of two types:
Consumer services: e.g. taxi, car repairing, schools etc
Producer Services: e.g. factory insurance, advertising agencies.
Features of a successful product
Every successful product has the following features:
It satisfying the needs and wants of the customers.
Its provides value for money to the consumers.
Usually distinctive from other me too products.
Stimulates interest of the consumers.
Process of New Product Development
Step 1-Idea Generation
Ideas for new products can be obtained from basic research using a
SWOT analysis (OPPORTUNITY ANALYSIS),
Market and consumer trends,
company's R&D department,
competitors,
focus groups,
employees,
salespeople,
corporate spies,
trade shows
Brainstorming
Step 2-Idea Screening
The object is to eliminate unsound concepts prior to devoting resources to them.
39

The screeners must ask at least three questions:

Will the customer in the target market benefit from the product?
What is the size and growth forecasts of the market segment/target market?
What is the current or expected competitive pressure for the product idea?
What are the industry sales and market trends the product idea is based on?
Is it technically feasible to manufacture the product?
Will the product be profitable when manufactured and delivered to the customer at the target price?
Step 3-Concept Development and Testing
Develop the marketing and engineering details
Who is the target market and who is the decision maker in the purchasing process?
What product features must the product incorporate?
What benefits will the product provide?
How will consumers react to the product?
How will the product be produced most cost effectively?
Prove feasibility through virtual computer aided rendering, and rapid prototyping
What will it cost to produce it?
Testing the Concept by asking a sample of prospective customers what they think of the idea.
Step 4-Business Analysis
The strategic management team has to think about the following issues:
Estimate likely selling price based upon competition and customer feedback
Estimate sales volume based upon size of market
Estimate profitability and breakeven point
Step 5-Beta Testing and Market Testing
Produce a physical prototype or mock-up
Test the product (and its packaging) in typical usage situations
Conduct focus group customer interviews or introduce at trade show
Make adjustments where necessary
Produce an initial run of the product and sell it in a test market area to determine customer acceptance
Step 6-Commercialization
If the test marketing stage has been successful the company will:
Launch the product (national or region by region)
Produce and place advertisements and other promotions
Fill the distribution pipeline with product
Critical path analysis is most useful at this stage
Process of Product Development (Simplified description)
A Product goes through a series of steps before it reaches the market:
It all starts with an idea. The idea needs to be further researched to see the feasibility of production. After this a market
research might be conducted to find out potential demand. If the marketing department sees a potential market, a
prototype is developed which is then tested in a limited market. Feedback is taken and if necessary changes are made to
the product to suit it to the market. Once the product is finalised the product is launched onto the main market.
Product Life Cycle
A Product life cycle shows the different stages through which a product goes from development to decline.

40

Introduction Stage
Product launched into the market.
Sales grow slowly.
Informative advertising is done.
Firm might not earn a profit at this stage.
Price skimming may be used if the product is new invention and has no competitors.
Competitive pricing may be used if it already has lot of competitors.
Growth Stage
Sales grow rapidly.
Persuasive advertising may be used.
Prices may be reduced if faced by stiff competition.
Firm starts earning profits.
Maturity Stage

Sales increase slowly and reach the highest sales figures.

Competition is at the maximum level as many new me too products may be in the market.
Promotional pricing might be a good option.
Profits are at the highest level as the firm is also getting economies of scale.
Repetitive advertising is done to remind the consumers.
Saturation Stage
Sales are stagnant.
Maximum competition but no new competitors and the market is already crowded with the same types of
products.
Promotional pricing or competitive pricing may be a good choice.
Advertising efforts at its highest point.
Decline Stage
Sales start to decline.
Profits start to come down.
Marketing research it done to find out whether this decline is permanent or temporary. If the decline is
permanent in nature then stop the production of the product, otherwise implement extension strategies.
Advertising is reduced.
Extension stage
Introduce new variations of the original product
41

Try to sell the product in different markets.

Make small changes in the colour, design or packaging
Start a new advertising campaign.
Add more retail outlets to boost sales.

Packaging
Why packaging is done?
To protect the product while transportation or storage. Usually for fragile products packaging is very important.
Think about transporting a 52 inch LCD television from Japan to US.
To promote the product, distinguish it among other products through vibrant colours, fonts or material of
packaging. On a departmental store self an attractive packing will play a vital role in attracting the attention of
the customers.
To inform the customers about the contents, ingredients, weight, size of the product. Many government make is
mandatory to print this information on the packing of the products
Branding
Why have a brand?
The objectives that a good brand will achieve include:
Delivers the message clearly
Confirms your credibility
Connects your target prospects emotionally
Motivates the buyer
Concretes User Loyalty
To succeed in branding you must understand the needs and wants of your customers and prospects. You do this by
integrating your brand strategies through your company at every point of public contact.
Your brand resides within the hearts and minds of customers, clients, and prospects. It is the sum total of their
experiences and perceptions, some of which you can influence, and some that you cannot.
A strong brand is invaluable as the battle for customers intensifies day by day. It's important to spend time investing in
researching, defining, and building your brand. After all your brand is the source of a promise to your consumer. It's a
foundational piece in your marketing communication and one you do not want to be without.
Price
Cost Plus Pricing
It involves estimating how many of the product will be produced, then calculating the total cost of producing this output
and finally adding a percentage mark-up for profit.
(Total Cost/Output)* % mark-up=Selling price
Penetration Pricing
Involves setting the price lower than the competitors prices. This strategy is usually followed where there is a lot of
competition and the product launched may not be unique.
Price Skimming
This is where the product is launched at a premium price. It is common with products which are a new invention and
people are willing to pay a premium price because of the novelty factors. It is quite common with Mobile phones and
other technological products.
Competitive Pricing
It involves setting the prices in line with the competitors price or just below their prices.
Promotional Pricing
42

It involves reducing the price of product for a limited period of time. Summer sales are an example of promotional
pricing.
Promotion
In todays business environment where communicating with the customer is everything, Promotion holds a very
important place in the Marketing mix. With so much of competition and me too products a successful business is one
which can communicate effectively with it customers and convince them to buy its products. Promotion is usually
thought as advertsing but Promotion is much more than advertising. It involves above the line and below the
line activities to communicate with their potential and existing customers and improve sales.
Above the line
Activities include advertising.
o Advertising means communicating with the customers through a paid media.
Advertising is of two types:
o Informative advertising is when the message communicated includes information about size, quantity,
ingredients, composition, configuration or content of the product. The idea is to influence people to buy
products buy showing the superiority of the product in terms of quantity or quality. This type of
advertising is usually common with technological products such as mobile phones or computers.
o Persuasive advertising is when the message communicated focuses on persuading the customers to buy
the product through celebrity endorsements, or use of glamour.
Usually advertisements have an element of both informative and persuasive advertising.
Mediums of advertising
Television
Radio
Newspaper and magazines
Posters/billboards
Leaflets/direct mail
Below the line
Activities include all other promotional activities except advertising i.e. Sales promotion
It includes activities like:
o price reduction
o giving out free gifts with every purchase
o organising competitions
o point of sale display
o demonstrations
o after-sales service
o giving out free samples
o Sponsorships
It includes sponsoring sports events or cultural shows or fashion shows
o Public relations
Organizing press conferences in giving out information about new products or carrying out some
social service activity.
o Personal selling
Where a representative from the company influences the customers to buy the product. It is
common for products which are expensive or custom designed. Sales person at a car showroom
is a typical example of personal selling.

Advertising
Advertising is the name given to the process of commercial promotion of goods and services in order to increase its
sales. Advertising can be done by means of a number of mediums like television, newspapers, wall paintings, billboards,
43

magazines, Internet, by the word-of-mouth and in many other ways. Advertising informs the buyers about the
availability of a certain product or service in the market and encourages them to buy it.
Objectives of advertising
The main objectives of advertising are:
Increasing the usage of a certain product and hence acquiring more orders.
Creating new customers and increasing brand recognition.
To obtain feedback from customers regarding a certain product.
To indicate introduction of new products or replacement of old ones.
Issues related with advertising
Apart from promoting commercial goods, advertising can also be used to educate and motivate the public about noncommercial issues such as AIDS, deforestation, family planning, etc.
It is a powerful media which is capable of reaching to the far out masses. Now a days we find many ads on the internet
also. These ads in most cases, have been successfully in connecting the user with the information he requires. To
prevent complete commercialization of electronic media, some countries have made it mandatory for broadcasters to
air some advertisements related to consumer interest. These public advertisements educate people of that country on a
number of social and moral issues.
However, some people are very keen on exposing the negative side of advertising. The impact that advertisements
cause depends on the state of mind of an individual and his past experiences. For instances, young kids will be easily
attracted by the false claims made in advertisements. People are also arguing about the increase in consumption of
substances like alcohol and cigarettes after viewing the ads. Excessive advertising has become a nuisance in most cities
of the world. Manufacturers easily make false claims about any product and influence the minds of the people. To
confront this problem, companies are being asked to withdraw any false and negative claims made in their ads and also
being made to pay a fine for these false claims.
Mediums of Advertising
Newspapers
Newspapers are one of the traditional mediums used by businesses, both big and small alike, to advertise their
businesses.
Advantages
Allows you to reach a huge number of people in a given geographic area
You have the flexibility in deciding the ad size and placement within the newspaper
Your ad can be as large as necessary to communicate as much of a story as you care to tell
Exposure to your ad is not limited; readers can go back to your message again and again if so desired.
Free help in creating and producing ad copy is usually available
Quick turn-around helps your ad reflect the changing market conditions. The ad you decide to run today can be
in your customers' hands in one to two days.
Disadvantages
Ad space can be expensive
Your ad has to compete against the clutter of other advertisers, including the giants ads run by supermarkets
and department stores as well as the ads of your competitors
Poor photo reproduction limits creativity
Newspapers are a price-oriented medium; most ads are for sales
Expect your ad to have a short shelf life, as newspapers are usually read once and then discarded.
You may be paying to send your message to a lot of people who will probably never be in the market to buy
from you.
Newspapers are a highly visible medium, so your competitors can quickly react to your prices

44

With the increasing popularity of the Internet, newspapers face declining readership and market penetration. A
growing number of readers now skip the print version of the newspaper (and hence the print ads) and instead
read the online version of the publication.

Magazines
Magazines are a more focused, albeit more expensive, alternative to newspaper advertising. This medium allows you to
reach highly targeted audiences.
Advantages
Allows for better targeting of audience, as you can choose magazine publications that cater to your specific
audience or whose editorial content specializes in topics of interest to your audience.
High reader involvement means that more attention will be paid to your advertisement
Better quality paper permits better color reproduction and full-color ads
The smaller page (generally 8 by 11 inches) permits even small ads to stand out
Disadvantages
Long lead times mean that you have to make plans weeks or months in advance
The slower lead time heightens the risk of your ad getting overtaken by events
There is limited flexibility in terms of ad placement and format.
Space and ad layout costs are higher
Yellow Pages
There are several forms of Yellow Pages that you can use to promote and advertise your business. Aside from the
traditional Yellow Pages supplied by phone companies, you can also check out specialized directories targeted to specific
markets (e.g. Hispanic Yellow Pages, Blacks, etc.); interactive or consumer search databases; Audiotex or talking yellow
pages; Internet directories containing national, local and regional listings; and other services classified as Yellow Pages.
Advantages
Wide availability, as mostly everyone uses the Yellow Pages
Non-intrusive
Action-oriented, as the audience is actually looking for the ads
Ads are reasonably inexpensive
Responses are easily tracked and measured
Frequency
Disadvantages
Pages can look cluttered, and your ad can easily get lost in the clutter
Your ad is placed together with all your competitors
Limited creativity in the ads, given the need to follow a pre-determined format
Ads slow to reflect market changes
Radio
Advantages
Radio is a universal medium enjoyed by people at one time or another during the day, at home, at work, and
even in the car.
The vast array of radio program formats offers to efficiently target your advertising dollars to narrowly defined
segments of consumers most likely to respond to your offer.
Gives your business personality through the creation of campaigns using sounds and voices
Free creative help is often available
Rates can generally be negotiated
During the past ten years, radio rates have seen less inflation than those for other media
Disadvantages
Because radio listeners are spread over many stations, you may have to advertise simultaneously on several
stations to reach your target audience
Listeners cannot go back to your ads to go over important points
45

Ads are an interruption in the entertainment. Because of this, a radio ad may require multiple exposure to break
through the listener's "tune-out" factor and ensure message retention
Radio is a background medium. Most listeners are doing something else while listening, which means that your
ad has to work hard to get their attention

Television
Advantages
Television permits you to reach large numbers of people on a national or regional level in a short period of time
Independent stations and cable offer new opportunities to pinpoint local audiences
Television being an image-building and visual medium, it offers the ability to convey your message with sight,
sound and motion
Disadvantages
Message is temporary, and may require multiple exposure for the ad to rise above the clutter
Ads on network affiliates are concentrated in local news broadcasts and station breaks
Preferred ad times are often sold out far in advance
Limited length of exposure, as most ads are only thirty seconds long or less, which limits the amount of
information you can communicate
Relatively expensive in terms of creative, production and airtime costs.
Direct Mail
Direct mail, often called direct marketing or direct response marketing, is a marketing technique in which the seller
sends marketing messages directly to the buyer. Direct mail include catalogs or other product literature with ordering
opportunities; sales letters; and sales letters with brochures.
Advantages
Your advertising message is targeted to those most likely to buy your product or service.
Marketing message can be personalized, thus helping increase positive response.
Your message can be as long as is necessary to fully tell your story.
Effectiveness of response to the campaign can be easily measured.
You have total control over the presentation of your advertising message.
Your ad campaign is hidden from your competitors until it's too late for them to react
Active involvement - the act of opening the mail and reading it -- can be elicited from the target market.
Disadvantages
Some people do not like receiving offers in their mail, and throw them immediately without even opening the
mail.
Resources need to be allocated in the maintenance of lists, as the success of this kind of promotional campaign
depends on the quality of your mailing list.
Long lead times are required for creative printing and mailing
Producing direct mail materials entail the expense of using various professionals - copywriter, artists,
photographers, printers, etc.
Can be expensive, depending on your target market, quality of your list and size of the campaign.
Telemarketing
Telephone sales, or telemarketing, is an effective system for introducing a company to a prospect and setting up
appointments.
Advantages
Provides a venue where you can easily interact with the prospect, answering any questions or concerns they
may have about your product or service.
It's easy to prospect and find the right person to talk to.
It's cost-effective compared to direct sales.
Results are highly measurable.
You can get a lot of information across if your script is properly structured.
46

If outsourcing, set-up cost is minimal

Increased efficiency since you can reach many more prospects by phone than you can with in-person sales calls.
Great tool to improve relationship and maintain contact with existing customers, as well as to introduce new
products to them
Makes it easy to expand sales territory as the phone allows you to call local, national and even global prospects.
Disadvantages
An increasing number of people have become averse to telemarketing.
More people are using technology to screen out unwanted callers, particularly telemarketers
Government is implementing tougher measures to curb unscrupulous telemarketers
Lots of businesses use telemarketing.
If hiring an outside firm to do telemarketing, there is lesser control in the process given that the people doing
the calls are not your employees
May need to hire a professional to prepare a well-crafted and effective script
It can be extremely expensive, particularly if the telemarketing is outsourced to an outside firm
It is most appropriate for high-ticket retail items or professional services.
Place
The fourth P of marketing is Place. If a product is very good, well promoted and the best prices offered still customers
would not be able to buy if it is not easily available to them. Thus, distribution is of vital importance.
Channels of distribution
There a four ways through which a product reaches the customers. These are also known as Channel of distribution.
Channel 1
Direct marketing from producer to consumers
Usually common for industrial products, it has become very popular in the consumer market with the improvement in
communication technology. It is usually employed by specialist mail-order manufacturers and factory outlets.
Channel 2
Manufacturer retailer consumer
The rise of large supermarkets chain has reduced the importance of the independent wholesaler. These retail chains buy
in bulk and thus deal directly with the manufactures and undertake their own wholesale functions. E.g. Carrefour, WalMart and Tesco.
Channel 3
Manufacturer wholesaler retailer consumer
This is the traditional channel in consumer goods market. Small retailers depend on wholesalers for supplies and
manufacturers are also keen to avail themselves the services of wholesalers. The wholesaler buys in bulk from the
producer and distributes to small retailers in according to their needs.
Channel 4
Manufacturer Agent Wholesaler Retailer consumer
This channel is common when manufacturers want to sell their products in a foreign market. Because of the
unfamiliarity to the foreign market the manufacturer takes the help of an agent who assists in the movement of goods
through the network of wholesalers and retailers.

47

Wholesaler
A person or a firm, who buys in bulk from the manufacture, breaks it into smaller quantities and supplies it to small
retailers.
Role of Wholesaler
Buys in bulk from the producer and breaks into small quantities to retailers.
Provide storage facilities, thus reducing the need for both manufacturer and retailer to hold such large stocks.
Wholesalers carry out marketing efforts at their level.
Provide credit facilities to small retailers.
Sometimes deliver the goods to the small business outlets.
Wholesalers usually do some amount of promotion at their level thus helping manufacturers in their marketing
efforts.

Scale of Production
Definition
Economies of scale: The increase in efficiency of production as the number of goods
being produced increases. Typically, a company that achieves
economies of scale lowers the average cost per unit through
increased production since fixed costs are shared over an increased
number of goods.
Diseconomies of scale: An economic concept referring to a situation in which
economies of scale no longer function for a firm. Rather than
experiencing continued decreasing costs per increase in output,
firms see an increase in marginal cost when output is increased.
Types of economies of scale
Purchasing economies
When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk. This
reduces the unit cost of raw materials and a firm gets an advantage over other smaller firms.
Marketing economies
48

The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large
firms can advertise more cheaply and more effectively than their smaller rivals.
Financial economies
A larger company tends to present a more secure investment; they find it easier to raise finance. Banks and other
lending institutions treat large firms more favorably and these firms are in a position to negotiate loans with preferential
interest rates. Further, large companies can issue shares and raise additional capital.
Managerial economies
A large company benefits from the services of specialist functional managers. These firms can employ a number of highly
specialized members on its management team, such as accountants, marketing managers which results in better
decision being taken and reduction in overall unit costs.
Technical economies
In large scale plants there are advantages in terms of the availability and use of specialist, indivisible equipment which
are not available to small firms. Large manufacturing firms often use flow production methods and apply the principle of
the division of labour. This use of flow production and the latest equipment will reduce the average costs of the large
manufacturing businesses.
Diseconomies of scale
Although economies of scale have the potential to increase both consumer and producer welfare, there are limits to the
advantages that they can bring. It is important to be aware of some of these.
Limited market demand
o The size of the market may be insufficient for any one business to fully exploit the available scale
economies. Large, indivisible units of capital equipment have the potential to produce high levels of
output - but if demand is at a low level, capital will be under-utilised leading to excess capacity and rising
average total costs.
Occupational immobility of capital
o Some large units of capital may not be transferable to other uses if there is a switch in consumer
demand.
A firm may grow beyond the scale of production that minimizes long-run average cost. The rise in LRAC is caused
by diseconomies of scale.

It is often difficult to pinpoint exactly the causes of diseconomies of scale. However management theorists often point
to the following factors.
Control
49

monitoring how productive each worker is within a large business is both imperfect and costly. This can
lead to a loss of productive efficiency if worker shirking is common
Co-ordination
o it is difficult to co-ordinate complicated production processes and they may break down. Achieving
efficient flows of information is expensive
Co-operation
o workers in big firms may feel a sense of alienation, perhaps perceiving that they don't really belong and
this may affect their productivity adversely

Lean production
Definition: Lean production is set of techniques used by business to cut down any waste
in operations. It is an integrated approach to design, technology,
components and materials.
The seven wastes
Waste elimination is one of the most effective ways to increase the profitability of any business. Processes either add
value or waste to the production of a good or service. The seven wastes originated in Japan, where waste is known as
muda." "The seven wastes" is a tool to further categorize muda and was originally developed by Toyotas Chief
Engineer Taiichi Ohno as the core of the Toyota Production System, also known as Lean Manufacturing. To eliminate
waste, it is important to understand exactly what waste is and where it exists. While products significantly differ
between factories, the typical wastes found in manufacturing environments are quite similar. For each waste, there is a
strategy to reduce or eliminate its effect on a company, thereby improving overall performance and quality.
Overproduction
Simply put, overproduction is to manufacture an item before it is actually required. Overproduction is highly costly to a
manufacturing plant because it prohibits the smooth flow of materials and actually degrades quality and productivity.
The Toyota Production System is also referred to as Just in Time (JIT) because every item is made just as it is needed.
Overproduction manufacturing is referred to as Just in Case. This creates excessive lead times, results in high storage
costs, and makes it difficult to detect defects. The simple solution to overproduction is turning off the tap; this requires a
lot of courage because the problems that overproduction is hiding will be revealed. The concept is to schedule and
produce only what can be immediately sold/shipped and improve machine changeover/set-up capability.
Waiting
Whenever goods are not moving or being processed, the waste of waiting occurs. Typically more than 99% of a product's
life in traditional batch-and-queue manufacture will be spent waiting to be processed. Much of a products lead time is
50

tied up in waiting for the next operation; this is usually because material flow is poor, production runs are too long, and
distances between work centers are too great. Goldratt (Theory of Constraints) has stated many times that one hour lost
in a bottleneck process is one hour lost to the entire factorys output, which can never be recovered. Linking processes
together so that one feeds directly into the next can dramatically reduce waiting.
Transporting
Transporting product between processes is a cost incursion which adds no value to the product. Excessive movement
and handling cause damage and are an opportunity for quality to deteriorate. Material handlers must be used to
transport the materials, resulting in another organizational cost that adds no customer value. Transportation can be
difficult to reduce due to the perceived costs of moving equipment and processes closer together. Furthermore, it is
often hard to determine which processes should be next to each other. Mapping product flows can make this easier to
visualize.
Over-processing
Many organizations use expensive high precision equipment where simpler tools would be sufficient. This often results
in poor plant layout because preceding or subsequent operations are located far apart. In addition they encourage high
asset utilization (over-production with minimal changeovers) in order to recover the high cost of this equipment. Toyota
is famous for their use of low-cost automation, combined with immaculately maintained, often older machines.
Investing in smaller, more flexible equipment where possible; creating manufacturing cells; and combining steps will
greatly reduce the waste of inappropriate processing.
Unnecessary inventory
Work in Progress (WIP) is a direct result of overproduction and waiting. Excess inventory tends to hide problems on the
plant floor, which must be identified and resolved in order to improve operating performance. Excess inventory
increases lead times, consumes productive floor space, delays the identification of problems, and inhibits
communication. By achieving a seamless flow between work centers, many manufacturers have been able to improve
customer service and slash inventories and their associated costs.
Motion
This waste is related to ergonomics and is seen in all instances of bending, stretching, walking, lifting, and reaching.
These are also health and safety issues, which in todays litigious society are becoming more of a problem for
organizations. Jobs with excessive motion should be analyzed and redesigned for improvement with the involvement of
plant personnel.
Defects
Having a direct impact to the bottom line, quality defects resulting in rework or scrap are a tremendous cost to
organizations. Associated costs include quarantining inventory, re-inspecting, rescheduling, and capacity loss. In many
organizations the total cost of defects is often a significant percentage of total manufacturing cost. Through employee
involvement and Continuous Process Improvement (CPI), there is a huge opportunity to reduce defects at many
facilities.
Underutilization of employees
In the latest edition of the lean manufacturing classic Lean Thinking, Underutilization of Employees has been added as
an eighth waste to Ohnos original seven wastes. Organizations employ their staff for their nimble fingers and strong
muscles but forget they come to work every day with a free brain. It is only by capitalizing on employees' creativity that
organizations can eliminate the other seven wastes and continuously improve their performance.
Lean Production Techniques
Many changes over recent years have driven organizations to become world class organizations or Lean Enterprises. The
first step in achieving that goal is to identify and attack the seven wastes. As Toyota and other world-class organizations
have come to realize, customers will pay for value added work, but never for waste.
51

Just in time (JIT) production and stock holding

Finished goods are produced just in time for them to be sold, rather than weeks or months ahead.
The parts that go into finished product arrive just in time to be put together to make a final product, rather than
being stored in a warehouse.
Requirements of successful JIT production
A flexible, multi-skilled workforce needed
Strict quality control with zero defects
JIT is usually implemented with cell production.
Excellent relationship with suppliers and subcontractors.
Advantages of JIT production
Virtually eliminates the need of stock of raw material and finished goods, thus reducing cost to the business.
Reduced work in progress
Increased workforce participation
Increased equipment utilization
Higher quality
Cell Production
This production involves both machines and human workers. In conventional production, products were manufactured
in separate areas (each with a responsibility for a different part of the manufacturing process) and many workers would
work on their own, as on a production line. In cell production, or cellular manufacturing workers are organized into
multi-skilled teams. Each team is responsible for a particular part of the production process including quality control and
health and safety. Each cell is made up of several teams who deliver finished items on to the next cell in the production
process. Cell production can lead to efficiency improvements due to increased motivation (team spirit and added
responsibility given to cells) and workers sharing their skills and expertise
Kaizen (Continuous Improvement)
Kaizen is Japanese for improvement. It is a Japanese philosophy that focuses on continuous improvement throughout all
aspects of life. When applied to the workplace, Kaizen activities continually improve all functions of a business from
manufacturing to management and from the CEO to the assembly line workers. By improving the standardized activities
and processes, Kaizen aims to eliminate waste. Kaizen was first implemented in several Japanese businesses during the
country's recovery after World War II, including Toyota, and has since spread to businesses throughout the world.
Kaizen is a daily activity whose purpose goes beyond simple productivity improvement. To be most effective kaizen must
operate with three principles in place:
Consider the process and the results (not results-only) so that actions to achieve effects are surfaced;
Systemic thinking of the whole process and not just that immediately in view (i.e. big picture, not solely the
narrow view) in order to avoid creating problems elsewhere in the process; and
A learning, non-judgmental, non-blaming (because blaming is wasteful) approach and intent will allow the reexamination of the assumptions that resulted in the current process.
The format for Kaizen can be individual, suggestion system, small group, or large group. At Toyota, it is usually a local
improvement within a workstation or local area and involves a small group in improving their own work environment
and productivity. This group is often guided through the kaizen process by a line supervisor; sometimes this is the line
supervisor's key role.
Kaizen methodology includes making changes and monitoring results, then adjusting. Large-scale pre-planning and
extensive project scheduling are replaced by smaller experiments, which can be rapidly adapted as new improvements
are suggested.

52

Quality
Quality Control
It is the traditional method of maintain quality and involves detecting and cutting out components or final products
which fall below set standards. This process takes place after these products have been produced. Quality control is
carried out by Quality control department which inspects and tests the finished products. It may involve considerable
waste as defect products are scrapped.
Quality Assurance
It occurs both during and after the event, and is concerned with trying to stop faults from happening in the first place.
The business will make sure quality standards are set and then it will apply these quality standards in the production
process. Quality assurance is the responsibility of the workforce, working in cells or teams, rather than an inspector.
Why quality assurance
More expensive and time consuming to implement than Quality Control
More effective, therefore more profitable
An integral part of a Total Quality Culture (TQC)
Some examples
Fair trade logo on products
Heart foundation on products
Free-range eggs
Total Quality management (TQM)
Total Quality Management, TQM, is a method by which management and employees can become involved in the
continuous improvement of the production of goods and services. It is a combination of quality and management tools
aimed at increasing business and reducing losses due to wasteful practices.
Why Total Quality Management?
Philosophy of the entire organization
Every function and every employee is responsible for quality
Zero defects is the goal
Quality is viewed from the customer perspective
Importance of quality
Driving forces of quality
Customer awareness
Competition
Legislation
Customer incomes
Advantages of good quality and cost of poor quality
Benefits of quality
Customer loyalty
Reduced costs
Longer life cycles
Stronger brand
Premium Pricing

Cost of poor quality

Re-work
Break-down
Late delivery
Unsafe
Complaints
Reputation

53

Total Quality Control/Total Quality Management

Advantages
Empowered workers
Reduced waste
Reputation/Image
Customer satisfaction

Limitation
Cost of implementation
Cost of equipment
Time consuming
Requires total commitment
Delayed benefits
Bureaucratic

The cost of ensuring quality

The cost of designing and setting up quality control systems
The cost of monitoring the system
The cost of improving the actual quality

Oral
Meetings

Written
Memos

Visual
Presentations

Appraisal
interviews
Stakeholder
meeting

Reports

Bulletin board

Emails

Diagrams/
Symbols

Team briefings

Faxes

Charts

One-on-one
conversations
Phone calls
Texting

Notices

Posters

Letters
Minutes

Photos
Online
conference
Graphs
Logo

Agenda
Newsletters
Website

Communications
Non-verbal
Formal
Body language Company
websites
Sign language
Stakeholder
meetings
Hugs/Smiles
Annual
company
report
Gestures
Appraisal
interviews
Braille
Memos
Conferences
Letters

Informal
Skype/Video
conferencing
Social
networks
Networking

ICT
Social
networks
Skype/Video
conferencing
Company
website

Phone calls

Email

Grapevine
Phone call
communication
Walkie Talkie
Text

Seminars
Leaflets

Powerpoint
Online
conference

Press
conference

What is communication
A process which enable information to be passed from one person/group to another
The process of communication can be shown below:
Message sent
Method of
communication

Message sent

Noise

Receiver

54

Methods of communication
There are 3 main methods of communicating, each of which has advantages and disadvantages
o Written
o Visual
o Verbal
Communication channels
Refers to the medium used to send the message.
They can be classified as:
o Internal communication
Communication within the business to its employees
o External communication
Communication to outside stakeholders
Internal communication
External communication
Team briefing
Letters
Face-to-face
Advertising
Reports
Direct mail below-the-line method of promotion
Memos
Internet
Notices
Conference
Network
Video
E-mail
E-mail
Electronic Data Interchange
Telephone
Fax
Causes of poor communication
Noise refers to communication problems that may weaken/stop a message being received
Examples include:
o Language problems/Cultural differences
Foreign languages, use of technical jargon, etc.
o Jumping to conclusions
The receiver may receive what they want to receive rather than what is actually there
o Lack of interest
The receiver may not be prepared to spend time on the message
o Competing environment
Real noise such as background sounds
o Channel of communication
This must be effective
Confirmation
Because of the problems that noise creates it is often useful for the sneder to ask the receiver for a response
and/or feedback
o Response
Reaction of the receiver after being exposed to the message
o Feedback
The part of the receivers response after being communicated to the sender.

Externalities
Externalities are the result of business activity that is not taken into account in normal business decision making.
Social costs and benefits are therefore the costs and benefits incurred by the entirety of society (producer,
consumer and third party) as a result of the production and/or consumption of a good or service.
55

Private costs and benefits are the costs and benefits incurred by individuals directly involved in the production
and/or consumption of a good or service.
Where no market failure exists social costs would be equal to private costs.
If external benefits exist more of the said good should be produced and consumed (it is being under-consumed
or under-produced) thus the market system is not supplying the optimum resource allocation.
If external costs exist than less of the said good should be produced and consumed (it is being consumed or
produced in excessive quantities) thus the market system is not supplying the optimum resource allocation.
Firms and individuals will not consume/produce any good or service unless the private benefit of their activity
exceeds the private cost incurred in their activity.

Positive and negative externalities

A positive externality is a favorable effect in result of business activity.
o A new local shop may be very convenient to a lot of people
A negative externality has negative effect in result of business activity.
o Pollution, accidents, congestion from too many vehicles on roads
o Obesity and lack of fitness from eating too much of the wrong type of food
o Drug dependence on certain medicines
o Greenhouse gas production and noise pollution from air transport
o Exploitation that is, businesses paying low wages (or using child labour) in order to increase their
profits.
The government will make sure that:
Merit goods (goods with external benefits) are encouraged (to prevent under-consumption or underproduction from occurring.)
Demerit goods (goods with external costs) are discouraged (to prevent over-consumption or over-production
from occurring.)
Demerit goods do not have prices which account for their external costs.
Smoking and alcohol are examples of demerit goods.
The government will:
Subsidize merit good producers to reduce the costs of production and thereby encourage production of such
goods whilst causing prices to be lowered as a result of the increase in supply and the decrease in prices of
production caused by subsidization.
Tax demerit good producers to increase the costs of production and thereby discourage production of such
goods whilst causing prices to increase as a result of the decrease in supply caused by taxations as well as by the
increase in the price of production.
Sometimes the government may choose to nationalize certain industries that are producing externalities to
regulate and control them and so force them to produce at the socially optimum level.
Laws and regulations Limits on the level of emissions of certain chemicals through use of the law and a fining
system to punish firms for infringement.
Ban on the use of certain chemicals which may result in significant external costs through use of the law and a
fining system to punish any infringement.
Forcing firms to internalize all costs: Pollution permits (these can be traded to firms who can then pollute more
at a reasonable price). Pollution permits are given out to firms by the government before any trading is done.
(Equivalent and derived from the Carbon Credits used internationally to restrict national pollution). But this
scheme is costly (administration costs are high) to implement, it is difficult to measure pollution levels
accurately, rich firms may simply buy their permits off poorer firms and so pollution may not have been
decreased at all, it is hard to calculate how many pollution permits to give out.
If external benefits exist then the public would be willing to pay more for a certain good to assure that it is
produced at the socially optimum level. (Increase in demand, extension along the supply curve).
If external costs exist that the public would be willing to pay more to assure that it is produced at the socially
optimum level. (Decrease in supply, contraction along the demand curve.)
56

Legal environment factors affecting business

Why do governments control business activities?
Businesses are usually profit motivated. Many times in order to gain more profit the business might neglect
issues like environmental protection and production of harmful and dangerous products.
Large business might take the advantage of their size and exploit consumers, employees and even use unfair
tactics to overcome competition from small businesses.
Business might use media to portray a wrong image of their product or may even mislead customers to buy
products.
How do governments control business activity?
Governments control the business activities is many ways both direct and indirect. We have already covered
governments economic policies. However, government can control business activities in a more direct way. These are as
follows:
Controlling what to produce
o In order to safeguard the interest of the community government may ban or limit the production of
certain goods and services. For example, selling of guns, explosive and dangerous drugs are illegal in
many countries. Moreover, Goods which harm the environment are also totally banned or strictly
controlled in many countries, e.g. aerosol cans that use CFCs which has been banned because of their
damaging effect on the ozone layer.
Employees Protection legislations
o Government may pass laws to protect the interest of employees such as laws against unfair
discrimination at work and when applying for jobs. There is no unfair discrimination on the basis of Race,
religion, sex, age, or colour.
Legislations for health and Safety at work:
o To protect workers from dangerous machinery.
o Workers should be provided with proper safety equipments and clothing.
o A reasonable workforce temperature is maintained for workers.
o Proper hygienic conditions and washing facilities are provided.
o Workers get adequate breaks between shifts.
Ensure fair wages for the employees
o In many countries, government makes it mandatory to have a written contract of employment. It contains
the details of the wage rate; working hours, deductions (if any) and other necessary details regarding
working conditions. Minimum wages paid to different types of workers are also determined by the
government.
Protect employees against unfair dismissal
o Business cannot dismiss the workers because they have joined a trade union or for being pregnant. There
should be proper warning before dismissing a worker otherwise it will be treated as unfair dismissal.
Consumer Protection legislations
o Most of the countries have consumer protection laws aimed at making sure that businesses act fairly
towards their consumers: A few examples are
Weight and Measures Act: goods sold should not be underweight. Standard weighting equipments
should be used to measure goods.
Trade Description Act: deliberately giving misleading impression about the product is illegal.
Consumer Credit Act: According to this act consumers should be given a copy of the credit
agreement and should be aware of the interest rates, length of loan while taking a loan.
Sale of Goods Act: It is illegal to sell products with serious flaws or problems and goods sold should
conform to the description provided.
Environment protection
o In the recent years government across the globe have passes legislations to control business activities from
harming the environment. This includes setting limits to the pollution, making it mandatory for businesses to
treat their wastes etc.
57

Location decisions
o Government often influences location of business through
o Planning controls involve restricting the business activities that can be undertaken in certain areas.
o Provide regional assistance to businesses which involves encouraging them to locate in underdeveloped
regions of the country.
Impact of business decisions on people and the environment

Government objectives
Employment
Growth
Government expenditure
Inflation
Trade must be balanced
Standard of living
Social and economic objectives
Economic objectives
To make sure that more people have jobs
To make sure that the economy grows from year to year,
so that citizens become better off
To protect consumers and business from unfair practices
by other businesses

Social objectives
To make sure that all children are educated in schools
To look after the health and well-being of citizens
To protect the
environment

local,

national

and

international

Types of government intervention

Public provision of goods and services
o Nationalisation
Creating rules and laws
o Regulation
o Too much regulation limits the freedom of business to make decisions: businesses become anxious in
case they unknowingly break the law.
o Too little regulation can lead to abuse for example, of employees, other businesses and customers and
the environment.
Taxing and subsidizing goods
o Raising taxes to create government revenue to use for social and economic objectives
E.g. business and income taxes are used to finance health care, education and building roads
Governments can raise taxes to discourage antisocial behavior such as smoking, and then use
that money for hospital care.
o Subsidies are used to encourage positive externalities
Involves providing funds to certain activities
E.g. growing important crops or introducing environmentally friendly technology.
IRL
Article
Noise pollution
India

Impact on business activity

in Businesses selling firecrackers may have lower
sales since noise from these are being curbed
Businesses in general produce noise pollution
Support of recycling Businesses need reduce water and energy
industry in China
consumption to meet quotas, production goes
down.

Government action
Increased regulation to decrease noise
pollution.
Increase regulation to decrease use of water
and energy
58

Support of textile It is now cheaper to produce textiles and this

industry in Egypt
decreases prices and increases employment
increases competition.
Pesticide ban
Food prices go up because production goes
down . Low supply and high demand. Cost-push
inflation due to increasing costs of production.
Might be demand-pull inflation due to high
demand of crops
Nigerian oil
Prices of oil go up as businesses have to spend
more money and production of oil goes down.
Pollution in France
Decrease demand for plastic cutlery.

Subsidise these industries to

investment to these businesses.

support

Increasing regulation

Increasing regulation
Increases taxes

Exchange rates
Definitions
Exchange rate: The value of a currency against another based on demand and supply of that currency in the market.
Appreciation: The rise in value of a currency against another
Depreciation: The decrease in value of a currency against another.
Demand for and Supply of a currency
This is what determines exchange rate in a free-floating exchange rate system:
When a currency has strong demand it will appreciate in value.
In contrast, when there is a large scale selling of a currency it will depreciate.
Demand for a currency:
Exports and imports of goods/services
o If a country has a decline in export industries and earnings, yet its people continue buying imports, the
exchange rate is likely to fall.
This is possibly not true for countries such as Hong Kong which are dependent on imports of oil and
food.
o Fewer exports will mean less demand for the currency to pay for them, so the demand for the currency will
decrease.
o This will lead to depreciation
o When a currency has depreciated, this makes the countries exports cheaper abroad.
o Thus, exports should become more competitive overseas.
Price elasticity of demand for imports
o When a currency depreciates, imports become more expensive.
o If the demand for imports is price elastic, this should lead to a fall in expenditure on imports
o This situation is found where imports compete with home-produced alternatives.
o When countries import necessities, such as food and oil, demand tends to be price inelastic so expenditure
rises when the currency falls.
Pure speculative demand.
o Speculators often purchase currencies that they think will appreciate in value against their own currency.
Official buying of the currency by the central bank.
o This might be done for investment or speculation or security or other reasons.
Comparatively higher domestic interest rate.
o Thus savers will be likely to convert their own money into your currency to save in your nation and enjoy the
comparatively higher domestic interest rates you offer.
Supply of a currency

Imports of goods and services.

59

Outflows of direct investment.

Outflows of portfolio investment.
Speculative selling of the currency.
Official selling of the currency by the central bank.
Rate of interest abroad.

Appreciation and Depreciation

Foreigners will tend to save money in ones nation.

Thus the demand for ones currency rises which can cause ones currency to appreciate in general.
Depreciation means that the value of the currency in terms of other currencies goes down:
If the USD depreciates against the RMB then it will take fewer RMB to buy each USD.
If 1 Euro was worth HKD 10.2 at the start of the year.
It may depreciate if the Greek government declared that it would withdraw from the Eurozone and go back to
using the Drachma in order to depreciate their currency.
This will cause others to lose confidence in the Euro and speculation will cause people to sell the Euro.

This may end up causing the Euro to depreciate to HKD 7 per Euro.
In this case the Euro has depreciated against the HKD because it now takes more Euros to purchase each HKD.

But the HKD has appreciated against the Euro because it now takes fewer HKD to buy 1 euro
Advantages of a Strong Currency
Lower import prices This boosts living standards of consumers.

An increase in the real purchasing power of HK residents traveling overseas for business and leisure purposes.
Cheaper to import raw materials, components and capital inputs causes an outward shift in short-run
aggregate supply.
Improvement in the terms of trade (lower import prices).

Helps to control RPI inflation Domestic producers face stiff international competition and must keep their
prices down. Lower inflation allows the MPC/HKMA to keep nominal interest rates at a lower level than if the
exchange rate was weak.
An increase in a countrys relative position in international league tables showing real GDP per capita when
expressed in a common currency:
Even if ones GDP, as measured in ones own currency, is no more than previously, because ones currency has
appreciated in value, the GDP of ones nation will also increase when it is translated into another currency.
Disadvantages of a Strong Currency
Cheaper imports lead to rising import penetration and large trade deficit:
Import penetration means that a larger portion of the goods and services provided by a nations firms is now
provided by foreign firms.
Exporters also lose price competitiveness and market share thus causing a trade deficit.
Damaged profit and employment in some sectors to which exporting is the key means of generating revenue.
Negative impact on economic growth (exports injections of aggregate demand, imports - leakages of wealth form
the circular flow of income).
Some regions which have a higher than average dependency on exporting industries are more affected than others.
Business cycle

60

Peak
The highest point between the end of an economic expansion and the start of a contraction in a business cycle. It is at
this point that real GDP spending in an economy is its highest level.
Confidence: Optimistic
Spending: High
o High borrowing, low saving
Income: High
Unemployment: Low
o Skills shortage
Inflation: High
Investment: High
o Firms expanding
Recession:
Negative economic growth or negative GDP for over two quarters
Confidence: Falling
Spending: Falling
o Less borrowing, more saving
Income: Falling
Slump/Trough:

Recovery/Expansion:
Asdf
Multinationals
Key ideas
Businesses which have their operations, factories, and assembly plants in more than one country.
Also known as transitional businesses
Why do firms become multinationals?
Firms become multinational for the following reasons:
By producing in various countries they can keep transport costs to a minimum.
They can avoid trade barriers by producing inside a country.
Can gain access to raw materials or cheap labour.
Reduce risks from foreign exchange fluctuations.
Impact of multinationals
Advantages of being a Multinational
61

Multinational can set up their business operations in countries where the labour and raw material is cheaper,
which can give them cost advantage in the international market.
Multinational have access to many markets which spreads the risk of failure. If any product may not be
successful in a particular market, it might be successful in another.
MNCs produce in large quantities thus achieving greater economies of scales.
A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries
where there is potential market for them and get away with import duties and restrictions.
o Protectionist methods
o Sanctions and embargoes
MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country

Multinationals create employment.
They bring new technology and techniques of production.
MNCs usually provide training to their worker which results in better skills for the countrys workforce.
Multinational businesses usually produce in large quantities and export to other countries which can result in
valuable foreign exchange for the host country.
They pay huge taxes to the government which can be used for the development of the host country
Creates sense of community crossing international borders.
Allows entire world to improve standard of living
Gives access to quality products regardless of location
Raises standard of living for regions involved in production
Gives local economies new economic opportunities.
Jobs are created, which reduces the level of unemployment.
Taxes are paid by the multinationals, which increases the funds to the government.
Disadvantages of Multinationals to the host country:
Ruins local economies
Depletes local work forces by drawing to metro centres
Stifles cultural growth and expansion on local level
Provides little help with problems which are local in nature
Creates cultural homogenization/cultural erosion
Too big, little interest in the individual.
Gives political power to outside interests
Creates economic instability by being subject to the whims of the global economy
Replaces traditional values with materialistic values
Makes local economies subject to mass layoffs.
Local firms may be forced out of business.
The jobs created are often unskilled.
Multinationals often use up scarce and non-renewable primary resources in the host country.
Advantages to home country:
MNC's create opportunities for marketing the products produced in the home country throughout the world.
They create employment opportunities to the people of home country both at home and abroad.
It gives a boost to the industrial activities of home country.
MNC's help to maintain favourable balance of payment of the home country in the long run.
Home country can also get the benefit of foreign culture brought by MNC's.
Disadvantages to home country:
62

MNC's transfer the capital from the home country to various host countries causing unfavourable balance of
payment.
MNC's may not create employment opportunities to the people of home country if it adopts geocentric
approach.
As investments in foreign countries are more profitable, MNC's may neglect the home countries industrial and
economic development.

63