Business IGCSE Notes – Complete Summary

Purpose of Business Activity:

The purpose of business activity is to identify and satisfy the needs and wants of the people with the overall aim of earning profit.

Concept of Adding Value:

To add extra features to a product. The customer is willing to pay more after the value has been added.

Nature of Economic Activity:

The nature of economic activity is that there are limited resources to satisfy unlimited wants. Due to the limited resources (Scarcity), everyone has to make choices (individuals, businesses, governments). This is known as the economic problem.

Factors of Production:

Land Labour Capital Enterprise

Primary Sector

Extraction of raw materials from the Earth. E.g. Mining, Fishing.

Secondary Sector

Processing of raw materials into finished or semi-finished products.

Tertiary Sector

Service Industries. E.g. Transport

Quaternary Sector

Hi-tech industries. E.g. Trading, Health.

Chain of Production = Primary Sector (Extracting Iron) Secondary Sector (Processing Iron into Car) Tertiary Sector (Sold by car dealership).

GDP = The total market value of all final goods and services produced in a country in a given year. High GDP = More Jobs, Better Infrastructure, High Productivity, Balance of Payment.

Decline: Primary and Secondary Sectors

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A key factor in the decline of both the primary and secondary sectors in recent years has been the impact of competition from overseas.

Great demand for raw materials in the UK has been increasingly met by imports Many manufacturing businesses have relocated overseas where production costs are

cheaper. Remaining UK-based manufacturing businesses have been forced to continually

lower their prices because of low-cost imports.

This decline is known as de-industrialisation.

Growth: Tertiary Sector

The growth in the tertiary sector has occurred for a number of reasons:

Increase in disposable income more paid on services

Tertiary businesses sell their services abroad and at home.

The tertiary sector has less scope for automation. Workers cannot be easily replaced with machines.

Disposable Income

Income remaining after deduction of taxes and other mandatory charges

Opportunity Cost

The next best alternative given up by choosing another item.

Specialisation/Division of Labour

When the production process is split up into parts and each worker performs one of these tasks.

Advantages Disadvantages

Increased efficiency More work in less time

Workers can become bored If one worker is absent, production is

stopped

Specialisation improves the efficiency of resources used (Scarce).

Value Added

Not the same as profit. It is the difference between the selling price of a product or service and the cost of bought in materials and components

The Size of a Business Can Be Measured By the Following Means

Sales turnover

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Share Capital Profit Market Share Number of Outlets

Why Businesses Wish To Grow

Benefit from economies of scale A larger Market Share As means of survival if they wish to compete with other growing businesses.

Organically Growing (Internal)

Lower Price Increasing Advertising Selling in different locations Sell on credit

Unnatural Growth (External)

Merger Takeover Conglomerate

Horizontal Merger

Merge or takeover a firm in the same industry at the same stage of production.

Vertical Merger

Merge or takeover a firm in the same industry, but at a different stage of production.

Conglomerate Merger

Merge or takeover a firm in a completely different industry. AKA Diversification.

Constraints On Growth (Disadvantages)

Financial Limitations Size of the Market Government Controls and Laws Human Resources Environmental Constraints Consumer Action and Pressure Groups

Economies of Scale

The advantages of the company being big. Leads to a reduction in average costs

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Purchasing EconomiesThe unit cost of each item decreases as large numbers of components are bought (buying in bulk)

Marketing EconomiesPurchase its own vehicles for distribution rather than rely on other companies. Sales staff numbers will decrease and the size of advertisement will increase

Managerial EconomiesSpecialists and highly qualified individuals will prefer to work with a well known company that can afford them, unlike small companies that cannot

Financial EconomiesRaise capital more cheaply as banks believe it is less risky to lend to a bigger business. A lower interest rate is therefore charged

Technical EconomiesFlow production –Specialists need advanced equipment to be bought and maintained . Smaller businesses may not be able to afford these expenses

Diseconomies of Scale

The disadvantages of the being big. Average costs increase as business grows beyond a certain size

Poor CommunicationThis makes sending/receiving messages much more difficult. Manager’s decisions will be responded to in longer amounts of time and top managers will be so busy directing affairs that they have no contact with employees/customers

Low MoraleEmployees will feel unimportant and will not establish any relationships with fellow employees. Managers will not work closely with subordinates, making them feel unvalued, reducing efficiency

TaxAs the size of the business increases, the higher the amount of corporation tax it will have to pay

Aims

The long term intentions of a business.

Objectives

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Targets that must be achieved in order to realise the stated aims of a business.

Aim Objective

Survive the year Maximise profits Increase market share Maximise share price

Open more stores More advertising Reduce costs Beat competitors Reduce waste Reduce prices

Private Ownership Options

Sole Trader – 1 Owner Partnership – 2-20 people (Solicitors, accountants) > Unlimited Liability

Private Limited Companies – Often a family run business with the protection of limited liability.

Public Limited Companies – Large organisations whose shares are traded on the stock exchange.

Franchises – Small business based upon an existing successful firm. Cooperatives – Collectively owned by workers/customers.

> Limited Liability

Unlimited Liability: Owners are responsible for all debts and may have to sell personal possessions.

Limited Liability: Owners can only lose their investment even if the company has huge debts.

Stakeholders

Any individual or group with a direct interest in the performance and activities of the business.

Suppliers – Keep a long term relationship Financer – Dividend Customer – Good quality for cheap price Employees – Work hard and receive salary Owner – Run their business and succeed

The business will try to please all stakeholders and achieve their aims, however, sometimes there are conflicts. I.E. Win some, lose some.

Aims of the Government

Low Unemployment Keep Inflation Down Economic Growth

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High Balance of Payment

How the Government Raises Its Money

VAT Income Tax Corporation Tax Road Tax National Insurance

An increase in income tax

A decrease In disposable income

A decrease in demand for products

A decrease in companies revenue

An increase in corporation tax

An increase in costs

A decrease in retained profits

A decrease in shareholder’s

dividend

A decrease in VAT

A decrease in the price of companies’ products

An increase in demand for products

An increase in companies’ revenues

Public Sector

Central government controls these organisations Main aim is to provide essential services for the whole population They are not profit making General public pays for these services through taxation Some services are the responsibility of local government, such as refuse collection

and the maintenance of parks

Government Control Over Business Activity

Production of goods and services Consumer protection Control of monopolies Protection of employees

A monopoly is when a single company owns all or nearly all of the market for a given type of product or service.

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Advantages of a Command Economy

There should be work for everybody The needs of the population are met

Disadvantages of a Command Economy

Fixed wages meaning less incentive to work Lack of profit meaning low efficiency/productivity

Advantages of a Free Market Economy

Workers work hard as they can keep most or all of their income due to low or non-existent taxes

Businesses compete with each other, meaning low prices

Disadvantages of a Free Market Economy

There could be many uncontrolled economic booms or recessions Businesses might be encouraged to create monopolies in order to increase prices

Advantages of a Mixed Economy

Government restrictions on monopolies Businesses will aim to gain profit (competition)

Disadvantages of a Mixed Economy

Companies in the private sector must pay taxes Too many government restrictions

How the Government Influences Private Firms

The law Providing assistance to business The government as a customer Controlling monopolies

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Interest rate

A cost for borrowing, or a reward for lending or saving.

Amount Borrowed x Interest Rate100

= Interest Paid

How interest rates affects business

Cost to business of borrowing money - High interest rates will cause costs to rise and profits to fall.

Cost to consumer of borrowing money - Consumers buy many goods with loans.- High interest rates will reduce demand as these goods become expensive.

Reward for Saving - High interest rates encourage people to save rather than spend money.

Inflation

When prices of goods and services are rising. The bank of England must control UK inflation. The target is 2%. If inflation is high they raise interest rates to reduce demand for goods. If inflation is low they reduce the interest rate. This leads to an increase in demand.

High inflation leads to

People real income falls Prices produced in country will be high No expansion for businesses

High Interest Rates Low Interest Rates

Make business expansion hard Make loans expensive Encourage customers to save

Make business expansion easy Make loans cheap Encourage customer to spend

Inflation causes the price of raw materials to rise The business reacts by raising its prices Customers can’t pay the higher prices The business sells less Its staff demand pay rises to match that inflation rate The business gives its staff pay rises The business must raise its prices again.

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Low levels of unemployment

Unemployed people do not produce (low output) High unemployment compensation

Economic Growth

Rising employment and rising consumer incomes High demand for goods and services Businesses sell more, employs more, people spend more, everyone is confident.

Recession

Falling employment and consumer incomes Fall in demand, consumer spending and confidence.

The business cycle

Economies go through periods of growth and recession, or ‘trade cycles’

Gross Domestic Product

The value of output of goods and services produced in the country during one year. Includes all primary, secondary & tertiary sectors.

Balance of Payments

Comparing the difference of the amount of exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, & vice versa.

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Electronic Commerce

E-commerce is the selling and buying of goods or services over the internet.

Advantages For Business:

Increased customer base Cost effective Improved productivity Improved competitiveness Reduce wastage

Disadvantages For Business:

Increased competition Slow adoption Purchasing the equipment Maintenance Training staff

Advantages For Customers:

Increased convenience Greater choice Cost effective Product details Customer reviews

Disadvantages For Customers:

No human interaction Returning goods Fraud Stock issues

International Trade

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Consumer choice Increased competition Business growth Free trade (workforces and technologies anywhere in the world)

Advantages to International Trade

Specialisation Consumers benefit from imported goods otherwise not available to them Competition Economies of scale Best workforces

Disadvantages to International Trade

Competition Movement to less well developed economies Negative balance of payment Global demand may be dominated by certain developed/developing economies

Barriers to Free Trade

Tariffs – A tax or duty to be paid on a particular class of imports or exports Subsidies – Money granted by the government to local companies Quotas – Limiting the amount of a particular product’s imports/exports/production Embargoes – Ban on trade or commercial activity with a particular country

Arguments For Trade Barriers

They help protect small businesses and new industries They prevent dumping They prevent over-specialisation by protecting a range of different industries

Arguments Against Trade Barriers

They restrict consumer choice and opportunities for new businesses and business growth

They protect inefficient domestic businesses with higher costs and often lower-quality products

Other countries will retaliate by introducing their own trade barriers

Entering Overseas Markets Problems

Language Barriers

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There are increased risks of non-payment Different cultures, customs and tastes will need to be understood The business must manage exchange rate risks The business must comply with different laws, regulations and taxes

Overcoming Problems

A business can use local contacts A business can set up assembly or sales only business units overseas It can enter into a joint venture with an overseas business A business can merge with or takeover an existing business

Management

Controlling

Measure and evaluate the work of all individuals and groups to ensure that they are on target. It is the manager’s job to find out why targets are not being met and then correct the problem

Planning

Planning for the future of the organisation by setting aims and objectives in order to give the business a sense of direction and purpose. It also involves planning which resources will be needed and setting strategies in order to achieve the set aims

Organising

Delegating tasks, responsibilities and resources to others in the organisation

Co-ordinating

Ensuring all departments in the organisation work together to achieve the plans originally set by the manager

Commanding

Ensuring all supervisors and workers are keeping to targets and deadlines. Instructions and guidance must be provided

Motivation

Improving the work ethic of employees through constant praise and rewards e.g. pay rise

Training

Giving knowledge to employees to help them achieve targets

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Qualities of a Good Manager

Intelligence Initiative Self confidence Assertiveness and determination Communication skills Energy and enthusiasm

Autocratic leader

A leader or manager in a business who doesn’t delegate authority to the subordinate and takes all the decisions by himself e.g. Police and defence

Democratic leader

A manager or leader who accepts the opinions of subordinates, discusses with them, delegates authority and then takes the decisions

Laissez-faire leader

A leader or manager in a business who gives full freedom to the subordinates in their area of work

Strategic decisions

Important decisions which can affect the overall success of the business

Tactical decisions

More frequently and less important

Operational decisions

Day-to-day decisions taken by a lower level manager

Departments in a Business

Accounting

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Prepares budgets Control cash flows

Marketing

Market research Extends product life cycle Plans new products

Human Resources

Recruit staff Interviewing and selecting staff Keep staff records

Production

Orders stock Extends product life cycle Decides production method

Administration

Cleaning, maintenance and security Clerical office support Responsibility for the IT system

Communication

If there is effective communication, there is high motivation.

Why Do Businesses Need to Communicate?

Obtain information Decide on a course of action Communicate plans for action

Communication Mediums

Oral Communication Letters Fax Meeting

Communications in business can be Informal or Formal

Written Communication Pros/Cons

Permanent record of the communication

Time consuming to produce/deliver Complicated language

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Can be studied later if necessary Can reach a wide number of people Effective at conveying complex or

important info

Instant feedback is not guaranteed Risk that messages may be ignored

Communication Problems

The sender may not explain themselves properly Information could have changed through the path of communication The sender may use the wrong language The receiver may not see or hear the information Faulty technology Timing of the information

How to Improve Communication

Technology Reduce the number of layers the communication has to go through (Delayering)

Exchange rates

How Are Exchange Rates Determined?

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Most currencies are allowed to vary or float on the foreign exchange market according to their demand and supply of each currency, just as the prices of goods can vary according to the demand and supply in a free market. Exchange rates will vary between currencies on a day by day basis depending on supply and demand for currencies.

Advantages for UK Firms of the UK Joining The Euro:

Lower costs as one price list throughout Europe can be used Lower costs as the charges for converting one European currency into another will

disappear Easier to trade with other European countries Easier to compare costs of supplies from different EU countries No risks of losing out from exchange rate charges between European currencies

Globalisation

When the world becomes one large market rather than a series of separate national markets

Free trade agreements and economic unions have reduced protection for industries. No import controls.

Improved travel links and communications between all parts of the world. Easier to compare prices and quality.

Advantages Disadvantages

Competition Consumer choice Cheaper prices Higher standard of living

Lower sales – Firms may find it hard to sell

Lower profits – Prices will be cut to compete

Business closure and loss of jobs

Protectionism

When countries protect their industries from overseas competition

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Problems

Retaliation Price rises Inefficient Industry

European Union

Organisation of 27 countries working to strengthen their economies. This leads to a single market within Europe. Selling goods anywhere in the member states is easier. No tariffs or controls.

- Creates a huge market for goods and services. Benefit from economies of scale

- Increased competition. More choice and lower prices, new higher quality products

Common Currency

All euro. Same interest rates. Could lead to same tax rates. The UK has not joined yet.

Motivation

The desire of workers to work hard and complete tasks well. Not the same as morale. High morale means workers are happy. This does not necessarily mean they work harder.

Motivation Increase Leads to

Higher Productivity Higher Quality Flexible Working Pattern

Financial Rewards

Wages & Salaries Fringe Benefits (Perks e.g. Holiday) Performance Related Pay – Piece Rates, Time Rates

Non Financial

Job Rotation (Different jobs) Job Enrichment (Interesting/challenging) Job Enlargement (More tasks of a similar nature) Better Working Conditions Empowerment and Team Working

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Person with the most authority is at the top. Least authority is at the bottom. This is known as the chain of command. Orders are delegated down the chain of command. the number of people each manager is responsible for is known as the span of control.

How the Hierarchical Structure Motivates Workers

Support mechanism Rewards Appraisal

By organising a company like this it allows them to specialise

It also increases accountability within each section e.g. performance can be monitored

Enables managers to identify which areas are performing well or not

Problems With a Long Chain of Command

Messages get lost or distorted Resistance to change from people further down the chain De-motivating – feeling of being alienated Each layer may own aims rather than that of the whole business

Delayering

Removing management layers of the hierarchy to flatten a long chain of command Responsibility and decision making gets pushed down the line – empowering

workers Empowerment - can motivate workers and they might get a pay rise Communication is quicker and more accurate End result = Cutting Costs

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Theories of Motivation

F.W.Taylor

Division of labour – breaking a job into small repetitive tasks, each of which can be done at a speed with little training.

Piece work – Means payment by result, e.g. per item produced Tight management – Ensure the workers concentrate on their jobs and follow the

correct processes

Herzberg’s Two Factor Theory

Motivators Hygiene/Maintenance Factors

Sense of achievement Recognition for effort and

achievement Nature of the work itself Responsibility Promotion and improvement

opportunities

Working conditions Supervision Pay Interpersonal relations Company policy and admin, inc,

paperwork, rules, red tape

Mcgregor Theory X and Theory Y

X= Dislike work, do not want responsibility and are not ambitious. Only work for money.

Y= Thinks work is natural and do not dislike it in principle. Accept responsibility and will seek it. Committed to hard work and their greatest need is self-actualisation.

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Account ing

Breaking Even

The break-even point is the level of output where an organization will just cover its costs. When a business first starts up, its financial objective is likely to be to break-even – particularly if it is a small business. If the business sells more than this, it will make a profit

Break-Even level of output = ¿Costs

Contribution

Fixed costs

Costs that do not vary with output or sales e.g. Salaries, rent, Insurance, Interest and loans

Variable Costs

Costs that vary with the quantity produced or sold e.g. costs of raw materials, sales staff commissions

Profit

Difference between total revenue and total costs

Contribution = Selling price – Variable Costs

Total Revenue = Selling Price x Quantity

Total Costs = Variable Costs + Fixed Costs

Example:

No. of Guests

0 20 40 60 80 100 120

Fixed Costs 200,000 200,000 200,000 200,000 200,000 200,000 200,000

Variable Costs 0 50,000 100,000 150,000 200,000 250,000 300,000

Total Costs 200,000 250,000 300,000 350,000 400,000 450,000 500,000

Sales Revenue 0 100,000 200,000 300,000 400,000 500,000 600,000

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Benefits of Break-Even chart

Make decisions about future investments Helps businesses understand what the level or volume of activity needs to be in

order to be profitable Cheap to carry out Loan/budgeting Helps spot potential problems

Limitations

External changes (cannot deal with sudden changes such as wages, prices and technological changes)

Not all produced is sold Fixed costs change with scale of production It can apply to a single product or single mix of products Rejects owners objectives of expansion (Fixed Costs)

Profit & Loss

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Sales = Price x Quantity

Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

Gross Profit = Sales – Cost of Goods Sold

Net Profit = Gross Profit – Expenses

Opening Stock

Goods at the beginning of the year

Closing Stock

Goods that are left at the end of the year

Expenses

Extra costs that help operate a business

Dividends

Return payments to shareholders for investing in the company

Direct Costs

Costs which can be identified directly with the production of a good or service e.g. Raw Materials

Indirect Costs

Costs which cannot be matched against each product because they need to be paid whether or not the production of goods or services take place e.g. Rent on the premises

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Balance Sheets

Shows the assets and liabilities of a business

Fixed Assets

Anything that you own as a business that can be useful for longer than one year e.g. Buildings, machinery

Current Assets

Last less than 12 months e.g. Cash, stock, debtors

Debtors

People who owe your business money

Current Liabilities

Things that a business will need to pay out for within 12 months e..g. Creditors, Overdrafts

Creditors

Groups that your business owes money to

Overdrafts

Money that must be paid back to the bank within 12 months

Net Current Assets/Working Capital

The money that a business has for the day-to-day running of the business

Net Current Assets = Current Assets – Current Liabilities

Net Assets Employed = Net Current Assets +Fixed Assets – Long Term Liabilities

Capital Employed

The money you initially begin with

Long Term Liabilities

Mortgage, Long term loans

Capital Employed = Net Assets Employed

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Ratio Analysis

1. Liquidity The ability of the firm to pay its way

2. Investment/Shareholders Information to enable decisions to be made on the extent of the risk and the earning potential of a business investment

3. Gearing Information on the relationship between the exposure of the business to loans as opposed to share capital

4. Profitability How effective the firm is at generating profits given sales and or its capital assets

5. Financial The rate at which the company sells its stock and the efficiency with which it uses its assets

Return on Capital Employed = Operating ProfitCapital Employed

x 100

Gross Profit Margin (%) = Gross ProfitSales Turnover

x 100

Net Profit Margin (%) = Net Profit Before TaxSales Turnover

x 100

Current Ratio = Current Assets

Current Liabilities

Acid Test Ratio = Current Assets−StocksCurrent Liabilities

Gearing Ratio = LongTerm LiabilitiesCapital Employed

x 100

Operating Profit

Net Profit before Tax & Interest & Dividends

Advantages of ratio analysis Disadvantages of ratio analysis

Evaluation of performance Setting targets Comparison with competitors

May not indicate how a business will perform in future

Inflation – comparison between years may be misleading

Budget

An estimate of income and expenditure for a set period of time.

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Cash Flow

The majority of businesses who do not survive their first year of trading, fail because of cash flow problems. Without sufficient cash to pay day-to-day bills, even a highly profitable firm will be unable to survive.

Improve Cash Flow: Increase/Advance Inflows

Offer cash discounts Reduce credit time Chase up outstanding money owed Sell assets Bank overdraft/loan

Improve Cash Flow: Decrease/Delay Outflows

Negotiate longer credit terms with suppliers Reduce purchases Sale and lease back

Overdraft

Banking facility that enables a firm to spend more than the balance of the account

Sale and Lease Back

When a firm sells property freehold but simultaneously leases it

Opening Balance

Cash you have at the start

Inflows

Funds that come into a business or organisation e.g. money, sales, debtors, loans

Outflows

Funds that leave the business or organisation e.g. Creditors, overdrafts, wages, bills

Net Flow

Inflow - Outflow

Closing Balance

Opening Balance + Net Flow

Debt Factoring

Business sells its debts to a debt factor who advances payments against the debts, for a fee

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Uses of a Cash Flow Forecast

Aids in decision making when starting up a business Running an existing business – future plans Managing cash flow Keeping the bank managers informed

How Cash Flow Problems Can Be Solved

Loans when negative cash flow Reduce or delay planned expenses Increase forecasted cash income in some way Ask for credit on purchases

Week 1 Week 2 Week 3 Week 4

Opening Bank Balance £30 £5 -£5 £10

Inflows

Pocket Money £0 £10 £0 £30

Wages £20 £5 £70 £0

Total Inflows £20 £15 £70 £30

Outflows

Canteen £10 £10 £10 £10

Travel £5 £5 £5 £5

Clothes £0 £0 £40 £0

Music £10 £0 £0 £10

Social £20 £10 £0 £5

Total Outflows £45 £25 £55 £30

Net Cash Flow -£25 -£10 £15 £0

Closing Bank Balance £5 -£5 £10 £10

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Sources of Finance

Internal sources (raised from within the organisation) External (raised from an outside source)

Owner’s Funds

When the person who starts the business brings their own savings into it

Doesn’t have to be repaid No restrictions

Limit to how much can be invested

Retained Profit

When a business uses its own profits to help expand in the future

• No interest• Doesn’t have to be repaid

• Not available to a new business• Business may not make enough profit

to plough back

Bank Loan

The business borrows and amount of money which is repaid in instalments with interest

• Spread over a period of time• No restrictions or limitations

• Expensive due to interest

• Bank may require security on the loan

Trade Credit

Buying goods from suppliers and not paying them for 30-60 days

• No interest charged if money is paid within agreed time

• Business can sell the goods first and pay for them later

• Discount given for cash payment would be lost

• Carefully manage cash flow to ensure money will be available when the debt is due to be paid

Overdrafts

When a business is allowed to spend more money in its account than it has

• Cheaper than a bank loan if used in the short-term

• Interest

• Can be expensive if used over a longer period of time

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Grants

When the government or EU provides the business with money as it is beneficial to the economy

• Don’t have to be repaid

• No interest

• Government restrictions

• Not all businesses are eligible

Hiring & Leasing

Using expensive equipment by paying a monthly charge

• Up to date equipment immediately• Fixed Cost

• Can be expensive

• The asset belongs to the finance company

Issuing Shares

Investors buy these from limited companies in return for a dividend each year

• No interest

• Doesn’t have to be repaid• Decreased control over the business• Dividends to more shareholders

Selling Assets

Selling buildings or pieces of equipment that it no longer needs

• Raise money from something no longer needed

• Unlikely to have surplus assets to sell

• Slow method of raising finance

Venture Capital

Finance from a company which specialises in lending to successful small businesses – often in exchange for shares

• More money to spend on growth survival

• Doesn’t have to be repaid

• Lost control

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Marketing

The management process responsible for identifying, anticipating and satisfying customer requirements profitably

Principles of Marketing

• Understanding customer needs• Keeping ahead of competition• Communicating effectively with consumers• Utilising new technology

Product Orientated Business

Focuses mainly on the activity of the product itself. Product orientated businesses tend to produce basic necessities and are general products that consumers need to buy – may not have their own name or brand. Manufacturer and retailer are mainly concerned with the price and quality of the product.

Market Orientated Business

Carry out market research to find out consumer wants, adapt to changes and set prices before a product is developed and produced. Market orientated businesses tend to survive more than product orientated businesses as they are usually more prepared for changes in customer tastes.

Objectives of Marketing

• To increase market share• To maintain or improve brand image• To target new sectors• To develop new products• To increase sales and profits

Market Segmentation

Where the market has been divided up into groups of consumers who have similar needs (segments). E.g. by income, age, region, gender, use of the product, lifestyle.

Market share

How much of the consumers the business owns, as in how much percentage the business’ products are bought from the total consumers buying the product.

Mass Market – a very large number of sales of a product

Niche Market – a small specialised segment of a much larger market

4 P’s = Price, Place, Product, Promotion. Also known as the marketing mix.

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Marketing Mix – Product

Branding and Differentiation

• A brand is a named product which customers can identify with and which is seen as different from other similar products

• Generic products are products made by a number of different businesses, which customers fail to recognise and differences between e.g. Mp3 player

• Own brand is one which is sold under the brand name of a supermarket, not the company that manufactured it

Achieving Branding and Differentiation

• Design. Make each product have different features, quality, build to others in the range. Make your product features different to those of competitors

• Name. Make each name unique. Either make the name reflect the product e.g. Gold blend coffee or make the name obscure to imply that it is highly technical e.g. Intel Pentium Processor. Some firms market themselves under the company name brand e.g. Cadbury, whereas others prefer to do it through individualised branding e.g. Nestle with Kit Kat and Yorkie.

• Quality. Value for money• Packaging. Attractive appeal, protect the product, instructions• Range. Appeal to different market segments• After Sales Service. So the customer gets help when they need it

The whole purpose of branding is repeat custom

Unique Selling Point (USP)

What makes it different from everything else on the market

Advantages of Branding/Differentiation

• Repeat Custom• Premium prices. A strong brand may allow firms to charge a higher price than rivals• Greater Consumer Awareness. Consumers are more likely to buy a high profile brand

rather than a rival’s less well known brand• Increased Sales and Market Share. Retailers will devote shelf space to well known

brands

Disadvantages of Branding/Differentiation

• High costs needed for massive promotion to establish and maintain the brand• A single bad event will affect the whole brand’s products• Launching a new version of the brand may lead to a risk of failure and damage to the

brand• Brand names may be difficult to protect in a world market – ‘fake’ products

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Extension Strategy

• Extending the maturity stage to benefit from high sales & profit• Slightly changing the product to give it a fresh appeal to it its target market• Appeal to new segments• Repositioning is directing the product and its benefits to different segments E.g.

Lucozade – went from sick people to targeting new segments• Wider Product Range is giving different variants to the same product E.g. Wrigley’s

gum and their flavours• Aiming the product towards Specific Target Markets• Changing the appearance and packaging

Saturation

When everyone has the product

Market Research

The process of gaining information about customers, products, competitors through the collection of primary and secondary data

Why Research the Market?

• Identify consumer wants• Reduce the risk of the product failing• Helps decide which products to introduce or kill off• Helps firms understand how to improve products• Look at what competitors are doing

Quantitative data is about facts that can be statistically analysed and/or expressed as numbers

Qualitative data is about opinions

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Stages of Market Research

• Designing the research- What needs to be achieved and the best method of achieving it- Qualitative or quantitative

• Undertake the research• Analyse the data

- Charts/Graphs- Reports

Primary Data – AKA Field Research

Original data that has been collected first hand

Questionnaire

• Everyone asked same questions• Easy to analyse

• Expensive and time consuming• Difficult to express own opinions

Interviews

• Detailed information• Can explain verbally/visually

• Expensive• Interviewer may travel some distance

Focus Groups

• Cheap• Response rate is good

• Other members could sway opinions• Too small a sample

Panels

• Detailed• Show how opinions change over time

• Difficult to keep same panel over time

Sampling

• Random – A percentage of the population is chosen. Equal chance of selection• Quota – Population is split into segments and a set number is chosen from each

segment. Reflects each segments opinions• Targeted – Asking only those who fit in a certain category

Product Samples

• Easy to do• Response rate is good

• Not representative• People reluctant to give criticism

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Secondary Data – AKA Desk Research

Data that already exists and has been collected by someone else E.g. Internet, Books, Newspaper, Market Research Agencies

Advantages of Desk Research

• Cheap• Instantly available• Wide collection of opinions• Time saving

Disadvantages of Desk Research

• Out of date/Continuously changing• Inaccurate (time consuming)• Does not anticipate consumer wants/needs• Only Market Research Agencies are expensive

Open Questions

Allow respondents to give opinions without being tied to a set answer E.g. What do you think about our product?

Closed Questions

Questions that require specific answers with a limited range of responses E.g. Do you use our product?

Bad Questions

Bias/Leading Questions – Make people answer it in the way you want them to

Weasel Words – Phrased so badly that it is misunderstood

Marketing Mix – Price

Cost-plus Pricing

Aimed at ensuring the business covers its costs and makes an acceptable profit. The total costs of producing one unit of the product are calculated to which is added the required profit margin. This gives the selling price

• Very easy and fast to calculate• Ensures that all costs are covered

• Does not look at what competitors are charging

• Does not take into account how much the customer is willing to pay

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Competitive Pricing

Competition is strong. Customers have a wide choice of suppliers to buy from. Businesses must set their prices close to the prices of competitors, having regards to the quality of the product and any unique selling points (USP’s)

• Avoid price competition which could damage the company

• Only just cover production costs – low profits

• Business must attract customers in other ways, price will not do

Price Skimming

New product is likely to generate a high volume of initial sales and is priced high to maximise profits. Price is reduced when initial demand has subsided

• High prices give the product a good image

• Pay back research and development costs

• Competitors may lower prices, taking away your market

• Put off potential customers because of high price

Penetration Pricing

Low initial price when entering the market to try and capture a share of the market. The price is then raised when more customers are aware of this product to maximise profit.

• Increases market share quickly• Attracts customers to try it

• Does not pay back R&D costs• Revenue is lost when low price

Promotional Pricing

Charging low prices for a short period of time to attract new customers and increase sales

• Earn revenue on what would not sell• Renew customer interests

• Profits will be lower• Can be risky if sales don’t rise

Psychological Pricing

Pricing strategy that pays attention to the effect that a price will have on the way a customer thinks E.g. £1.99 instead of £2

• Encourages customer to buy • Calculation complication

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Destroyer Pricing

When a business lowers its product’s pricing so much that all competitors are destroyed

• Increases market share• Increases sales

• Reduces profits• Small profit cannot be used on

growth/extension

Price Discrimination

Dependant on the customer. E.g. Health insurance for an old person in comparison with a young person

Prices are driven by market forces called demand and supply

If price goes up, demand goes down and vice versa

If price goes up, to take advantage of higher profits, supply also goes up.

The place where the two lines cross is called the equilibrium, where the same number of goods are demanded and in supply resulting in no leftovers

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Factors Affecting Demand

• The popularity of substitute products (products that can be used instead of the product)

• The popularity of complimentary products (products that require each other or are used together)

• Changes in income• Changes in taste and fashion• Changes in advertising

Factors Affecting Supply

• Taxes and Subsidies – Higher taxes means higher costs. Subsidies lead to lower costs.• Climate (for agricultural products) – Supply of crops depends on weather• Improvements in technology – Makes it cheaper to produce goods• Costs in supplying goods to the market

- Price of raw materials- Wage rates (because of inflation)

Price Elasticity

Percentage Change∈Quantity DemandedPercentage Change∈Price Sold

If result = 1 or above then it is elastic. If price is changed then sales decrease/demand falls. Consumers do react

If result = Less than 1 then it is inelastic. Can be sold at a higher price as demand will not change. Usually high quality branded products. Consumers do not react much.

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Marketing Mix – Place

Where the product is sold and how it gets to the customer

Channel of Distribution

The route and stages the product goes through to reach the final customer

Method #1

Customer convenience Cost saving as consumers are close

Limited number of consumers nearby If product is big then it will be

expensive to mail/ship

Method #2

Everyday products need to be widely available – retailers provide this

Helps perishable products sell quickly

Competitors will use the same retailer to compete directly for customers

Increased cost - extending credit to retailers

Method #3

Breaking bulk Reduce storage Provide credit to small retailers

More expensive to buy from wholesaler

May not have the full range of products to sell

Takes longer for fresh produce to reach shops

Breaking Bulk

The wholesaler buys in large quantities from the manufacturer and sells to the retailer in small quantities

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Method #4

Manufacturer has some control over the way the product is sold in other markets

Agent is aware of local conditions and what places best sell

Agent will charge a price or receive a commission on sales

Prices may be raised by manufacturer to cover cost of agent. Every stage following also increases price

Marketing Mix – Promotion

1. Advertising Paid for communication. Create awareness and transmit information in order

to gain a response from the target market.

Above the line advertising: Expensive medium – e.g. TV

Below the line advertising: Cheap medium – e.g. leaflet

2. Sales Promotions

3. Public Relations The actions of a corporation promoting good will between itself and the

public, the community. Employees, customers etc.Newsletters, Press releases, blogs, photos, social media.

4. Personal Selling Promotion Effective way to manage personal customer relationships. The sales person

acts on behalf of the organisation. They are well trained and have good speaking skills. However, they are very expensive and should only be used when there is a genuine return on investment.

5. Trade Fairs and Exhibitions Excellent way to talk directly to customers. Show larger items (boats, cars etc) Demonstrate Products

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Extra % feeFree GiftsCoupons

EventsCompetitionsFree Samples

Buy one get one free

6. Sponsorship Positive associations of the product with a celebrity. Can be very expensive Difficult to tell what impact this has on brand loyalty or sales

Factors Affecting Location

Production- Labour- Natural resources- Suppliers

Cost of premises Government influence (Grants – Limits on production (CO2 emissions - tax) Business rates (Monthly payments E.g. Power, Water) Transport and communications Information Technology Customers History and tradition Climate Personal preferences of the owner Competitors

Factors Affecting Production

Job Production - Catered to meet each customer’s specific order. One off product.

Exact Requirements Job satisfaction High quality goods Design is flexible

Expensive Time consuming Advantages of economies of scale are

lost

Batch Production – Produces a number of similar items. Created in parts that are put together at the end.

Workers may specialise Labour costs lowered so final price is

lowered Machinery may be used Production is faster

Uninteresting work (repetitive) More space is required for working

and storage Larger stock of raw materials must be

kept

Flow Production – When the product is standardised and can be made using a production line method. Continuous process takes place.

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Final product is inexpensive Production is fast Large quantities can be

manufactured

Work is repetitive (low motivation) Large stock of raw materials must be

kept Large capital investment is required

Productivity – The quantity of goods produced in a given time. AKA output.

Productivity formula

Workers x Pieces created by workers x Time

Improve efficiency – More produced in the same amount of time. Less costs, more profits

Labour productivity – When workers are trained, skills are developed and used more efficiently to produce more in the same amount of time.

Ways of improving productivity

Training staff Specialisation Improve technology/machinery Reduce downtime Improve motivation Better quality raw materials

Downtime – When production is slowed or stopped

Quality

Consistently providing what the customer wants by meeting their needs and expectations. Poor quality is a source of competitive disadvantage.

Results of poor quality

Lost customers Cost of reworking or making product Cost of replacement or refunds Wasted materials

Quality Management

Quality control Quality assurance Total quality management (TQM)

Quality Control

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Detection, not prevention. This makes it very expensive. Identify faulty products. This involves inspecting and sampling products as they are produced.

Maximises production Sampled at regular intervals to check

for errors.

Higher costs in remaking products Wasted materials

Quality Assurance

How the product is designed to minimise the chances of a fault – prevent. The focus is on the development stage. If production is well controlled, then quality will be built in. if production is reliable, there is less need to inspect production output.

Quality is built in A quality standard is set

If workers do not support the system, it will not be effective

Cost, demand and delivery schedules can be hard to anticipate.

Total Quality Management

Attitude based. The whole business understands the need for quality and seeks to achieve it. Every stage of production is concerned and quality is checked by workers, not inspectors.

Sampling and inspection at end are eliminated.

Workers are motivated, as they are given more responsibility

Time consuming Workers must be trained

Lean Production

Reducing waste Improving efficiency Improves quality of products

Kaizen

Continuous improvement. Overall progress comes from small improvements being made all the time, even when the process/product seems to be working. Groups of employees meet regularly to discuss ways in which production quality can be improved.

Kanban

System that uses two components. One being used on the production line, while the other is being made ready. E.g. Component bins, one with materials to build car. Bin 2 is being filled and will be delivered when bin 1 is empty.

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Cell production

Where work is organised into team and are given responsibilities. This leads to improved productivity as a result of increased motivation (team spirit and added responsibility) and specialisation.

Just In time

Focus is on reducing or eliminating the need to hold stocks. Raw materials are ordered when order is placed, delivered just in time to be used in the production process. Making of parts are just in time to be used in the next stage, and the product is finished just in time to be delivered to the customer.

Reduces costs of holding stock No money held up in stock

Reliable suppliers and customers are needed.

Difficult to meet sudden increase in demand.

Boston Matrix

Describes products according to their market share they enjoy and whether the market has any potential to grow.

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Dogs are at the end of their life cycle. Cash cows at the maturity stage of their product life cycle. Stars are profitable products.

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